Stock Quotes in this Article: ACTG, CHE, CMG, ICUI, SWKS

DELAFIELD, Wis. (Stockpickr) -- Short-sellers hate being caught short a stock that reports a blowout quarter. When this happens, we often see a tradable short squeeze develop as the bears rush to cover their positions to avoid big losses. Even the best short-sellers know that it's never a great idea to stay short once a bullish earnings report sparks a big short-covering rally.

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This is why I scan the market for heavily shorted stocks that are about to report earnings. You only need to find a few of these stocks in a year to help enhance your portfolio returns -- the gains become so outsized in such a short time frame that your profits add up quickly.

That said, let's not forget that stocks are heavily shorted for a reason, so you have to use trading discipline and sound money management when playing earnings short-squeeze candidates. It's important that you don't go betting the farm on these plays and that you manage your risk accordingly. Sometimes the best play is to wait for the stock to break out following the report before you jump in to profit off a short squeeze. This way, you're letting the trend emerge after the market has digested all of the news.

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Of course, sometimes the stock is going to be in such high demand that you risk missing a lot of the move by waiting. That's why it can be worth betting prior to the report -- but only if the stock is acting technically very bullish and you have a very strong conviction that it is going to rip higher. Just remember that even when you have that conviction and have done your due diligence, the stock can still get hammered if The Street doesn't like the numbers or guidance.

If you do decide to bet ahead of a quarter, then you might want to use options to limit your capital exposure. Heavily shorted stocks are usually the names that make the biggest post-earnings moves and have the most volatility. I personally prefer to wait until all the earnings-related news is out for a heavily shorted stock and then jump in and trade the prevailing trend.

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With that in mind, here's a look at several stocks that could experience big short squeezes when they report earnings this week.

Acacia Research

My first earnings short-squeeze trade idea to consider is Acacia Research (ACTG), a developer, licenser and acquirer of technology patents, which is set to release numbers on Thursday after the market close. Wall Street analysts, on average, expect Acacia Research to report revenue of $66.98 million on earnings of 47cents per share.

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The current short interest as a percentage of the float for Acacia Research is notable at 6%. That means that out of the 44.12 million shares in the tradable float, 2.85 million shares are sold short by the bears. If the bulls like the earnings news they hear, then this stock could easily see a solid short-squeeze develop post-earnings.

From a technical perspective, ACTG is currently trending above its 50-day moving average and just below its 200-day moving average, which is neutral trendwise. This stock has been uptrending for the last few weeks, with shares moving higher from its low of $20.37 to its intraday high of $25.74 a share. During that move, shares of ACTG have been mostly making higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of ACTG within range of triggering a major breakout trade.

If you're bullish on ACTG, then I would wait until after its report and look for long-biased trades if this stock manages to break out above some near-term overhead resistance at $25.74 to just above $27 a share with high volume. Look for volume on that move that registers near or above its three-month average volume of 728,541 shares. If we get that breakout, then ACTG will set up to re-test or possibly take out its next major overhead resistance levels at $30 to $32.50 a share. Any high-volume move above those levels will then put $40 into range for shares of ACTG.

I would simply avoid ACTG or look for short-biased trades if after earnings it fails to trigger that breakout, and then drops back below its 50-day at $24.07 a share with high volume. If we get that move, then ACTG will set up to re-test or possibly take out its next major support levels at $22 to $20.37 a share.

Chemed

Another potential earnings short-squeeze play is health care facilities and services player Chemed (CHE), which is set to release its numbers on Thursday after the market close. Wall Street analysts, on average, expect Chemed to report revenue of $368.06 million on earnings of $1.33 per share.

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The current short interest as a percentage of the float for Chemed is extremely high at 21.2%. That means that out of the 18.30 million shares in the tradable float, 3.86 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 4.8%, or by about 175,000 shares. If the bears are caught pressing their bets into a bullish quarter, then shares of CHE could easily see a sharp short-squeeze develop post-earnings.

From a technical perspective, CHE is currently trending above both its 50-day and 200-day moving averages, which is bullish. This stock has been uptrending strong for the last two months and change, with shares soaring higher from its low of $61.52 to its recent high of $76.15 a share. During that uptrend, shares of CHE have been consistently making higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of CHE within range of triggering a near-term breakout trade.

If you're in the bull camp on CHE, then I would wait until after its report and look for long-biased trades if this stock manages to break out above some near-term overhead resistance at $76.15 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 328,633 shares. If that breakout triggers, then CHE will set up to re-fill its previous gap down zone from May that started at $81.78 a share. If that gap gets filled, then CHE could easily hit $85 to $90 a share post-earnings.

I would simply avoid CHE or look for short-biased trades if after earnings it fails to trigger that breakout, and then drops back below some near-term support at $74 a share with high volume. If we get that move, then CHE will set up to re-test or possibly take out its 200-day at $72.25 a share or its 50-day at $70.91 a share. Any high-volume move below those levels will then put its next major support zones at $68 to $66 into range for shares of CHE.

Skyworks Solutions

One potential earnings short-squeeze candidate is semiconductor player Skyworks Solutions (SWKS), which is set to release numbers on Thursday after the market close. Wall Street analysts, on average, expect Skyworks Solutions to report revenue of $4.35.41 million on earnings of 53 cents per share.

Just recently, Sterne Agee recommended Skyworks as a buy at current levels, noting that it expects smart phone unit builds to rise 15% in the second half of 2013 vs. the first half of 2013.

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The current short interest as a percentage of the float for Skyworks Solutions stands at 5.9%. That means that out of the 189.87 million shares in the tradable float, 11.13 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 18.8%, or by about 1.75 million shares. If the bears are caught pressing their bets into a bullish quarter, then shares of SWKS could easily explode higher post-earnings if a short-squeeze develops.

From a technical perspective, SWKS is currently trending above both its 50-day and 200-day moving averages, which is bullish. This stock has been trending sideways for the last month and change, with shares moving between $20.61 on the downside and $22.77 on the upside. A high-volume move above the upper-end of its recent range could trigger a breakout trade for shares of SWKS post-earnings.

If you're bullish on SWKS, then I would wait until after its report and look for long-biased trades if this stock manages to break out above some near-term overhead resistance at $22.77 to $23 a share with high volume. Look for volume on that move that registers near or above its three-month average action of 3.23 million shares. If we get that breakout, then SWKS will set up to re-test or possibly take out its next major overhead resistance levels at $24.58 to $25.10 a share. Any high-volume move above those levels will then put its next major overhead resistance levels at $29 to $30 into range for shares of SWKS.

I would avoid SWKS or look for short-biased trades if after earnings it fails to trigger that breakout, and then drops back below its 200-day at $21.99 a share with high volume. If we get that move, then SWKS will set up to re-test or possibly take out its next major support levels at $20.95 to $20.61 a share. Any high-volume move below those levels will then put its next major support levels at $19.57 to $19.21 into range for shares of SWKS.

ICU Medical

Another earnings short-squeeze prospect is maker of custom-made IV products ICU Medical (ICUI), which is set to release numbers on Thursday after the market close. Wall Street analysts, on average, expect ICU Medical to report revenue of $83.43 million on earnings of 66 cents per share.

During the last quarter, this company reported revenue of $74.3 million and GAAP reported sales were 1.6% lower than the prior-year quarter's $75.5 million. Also during the last quarter, EPS was 58 cents per share and GAAP EPS was 58 cents per share, which was 9.4% higher than the prior-year quarter's 53 cents per share.

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The current short interest as a percentage of the float for ICU Medical is pretty high at 9.7%. That means that out of the 12.83 million shares in the tradable float, 1.24 million shares are sold short by the bears. This is a decent short interest on a stock with a very low float. Any bullish earnings news could set off a monster short-squeeze for shares of ICUI post-earnings.

From a technical perspective, ICUI is currently trending above both its 50-day and 200-day moving averages, which is bullish. This stock has been trending sideways for the last month and change, with shares moving between $71.76 on the downside and $76.64 on the upside. A high-volume move above the upper end of its recent range could trigger a major breakout trade for shares of ICUI post-earnings.

If you're bullish on ICUI, then I would wait until after its report and look for long-biased trades if this stock manages to break out above some near-term overhead resistance levels at $76.31 to its 52-week high at $76.64 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 121,890 shares. If that breakout hits, then ICUI will set up to enter new 52-week-high territory, which is bullish technical price action. Some possible upside targets off that breakout are $85 to $90 a share.

I would avoid ICUI or look for short-biased trades if after earnings it fails to trigger that breakout, and then drops back below its 50-day moving average of $71.17 a share with high volume. If we get that move, then ICUI will set up to re-test or possibly take out its next major support levels at $66.78 to its 200-day at $62.80 a share.

Chipotle Mexican Grill

My final earnings short-squeeze trade idea to check out is quick service restaurant player Chipotle Mexican Grill (CMG), which is set to release numbers on Thursday after the market close. Wall Street analysts, on average, expect Chipotle Mexican Grill to report revenue of $802.70 million on earnings of $2.81 per share.

Just recently, research firm Buckingham said Chipotle Mexican Grill faces a variety of headwinds, including slowing comparative increases and labor cost pressures. The firm thinks comparative store sales will rise 3.4% in the second quarter, down sharply from 8% during the same period in 2012.

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The current short interest as a percentage of the float for Chipotle Mexican Grill stands is pretty high at 9.1%. That means that out of the 30.40 million shares in the tradable float, 2.76 million shares are sold short by the bears. This is a decent short interest on a stock with relatively low tradable float. Any bullish earnings news could easily spark a solid short-covering rally for shares of CMG post-earnings.

From a technical perspective, CMG is currently trending above both its 50-day and 200-day moving averages, which is bullish. This stock has been uptrending strong for the last six months, with shares soaring higher from its low of $290 to its recent high of $389.84 a share. During that uptrend, shares of CMG have been mostly making higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of CMG within range of triggering a near-term breakout trade.

If you're in the bull camp on CMG, then I would wait until after its report and look for long-biased trades if this stock manages to break out above some near-term overhead resistance levels at $387.49 to $389.84 a share with high volume. Look for volume on that move that hits near or above its three-month average volume of 444,013 shares. If that breakout triggers, then CMG will set up to re-test or possibly take out its 52-week high at $404.59 a share. Any high-volume move above that level will then put its next major resistance level at $419.69 into range for shares of CMG.

I would avoid CMG or look for short-biased trades if after earnings it fails to trigger that breakout and then drops back below its 50-day at $369.89 a share with high volume. If we get that move, then CMG will set up to re-test or possibly take out its next major support levels at $352.27 to $350.66 a share. Any high-volume move below those levels will then put its next major support levels at $330 to $327.28 into range for shares of CMG.

To see more potential earnings short squeeze plays, check out the Earnings Short Squeeze Plays portfolio on Stockpickr.

-- Written by Roberto Pedone in Delafield, Wis.

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At the time of publication, author had no positions in stocks mentioned.

Roberto Pedone, based out of Delafield, Wis., is an independent trader who focuses on technical analysis for small- and large-cap stocks, options, futures, commodities and currencies. Roberto studied international business at the Milwaukee School of Engineering, and he spent a year overseas studying business in Lubeck, Germany. His work has appeared on financial outlets including CNBC.com and Forbes.com. You can follow Pedone on Twitter at www.twitter.com/zerosum24 or @zerosum24.