Stock Quotes in this Article: AUXL, UPL, SKUL, PRLB, LOCK

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.

Ultra Petroleum

My first earnings short-squeeze play is oil and gas exploration player Ultra Petroleum (UPL), which is set to release numbers on Friday before the market open. Wall Street analysts, on average, expect Ultra Petroleum to report revenue of $234.98 million on earnings of 42 cents per share.

During the last quarter, this company reported revenue of $225.6 million and GAAP reported sales were 0.2% lower than the prior-year quarter's $226.1 million. Also last quarter, this company reported non-GAAP EPS of 38 cents per share and GAAP EPS was 11 cents per share, which was 80% lower than the prior-year quarter's 55 cents per share.

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The current short interest as a percentage of the float for Ultra Petroleum is extremely high at 22.8%. That means that out of the 149.85 million shares in the tradable float, 33.80 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 3.6%, or by about 1.17 million shares. If the bears are caught pressing their bets into a bullish quarter, then shares of UPL could easily rip higher post-earnings as the shorts rush to cover some of those bets.

From a technical perspective, UPL is currently trending above its 200-day moving average and just below its 50-day moving average, which is neutral trendwise. This stock has been trending sideways for the last two months, with shares moving between $19.52 on the downside and $22.47 on the upside. A high-volume move above the upper end of its recent range post-earnings could trigger a big breakout trade for shares of UPL.

If you're bullish on UPL, 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 $21.96 to $22.47 a share with high volume. Look for volume on that move that registers near or above its three-month average volume of 3.10 million shares. If that breakout hits, then UPL will set up to re-test or possibly take out its 52-week high at $24.52 a share. Any high-volume move above that level will then put $26 to $27.60, or even $30 into range for shares of UPL.

I would simply avoid UPL or look for short-biased trades if after earnings it fails to trigger that breakout, and then drops back below its 200-day at $20.33 and then below more near-term support levels at $20.08 to $19.52 a share with high volume. If we get that move, then UPL will set up to re-test or possibly take out its next major support levels at $18.39 to $17 a share. Any high-volume move below those levels will then give UPL a chance to tag its next major support areas at $16.50 to $16 a share.

Proto Labs

Another potential earnings short-squeeze trade is Proto Labs (PRLB), which produces CNC machined and injection molded plastic parts and is set to release its numbers on Thursday before the market open. Wall Street analysts, on average, expect Proto Labs to report revenue of $40.25 million on earnings of 35 cents per share.

Just recently, Piper Jaffray said its survey indicates demand tracked ahead of plan for the 3D printing/rapid prototyping market during the June quarter. With that in mind, piper expects impressive second-quarter results from names like Proto Labs.

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The current short interest as a percentage of the float for Proto Labs is very high at 16%. That means that out of the 18.19 million shares in the tradable float, 7.41 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 16.8%, or by about 438,000 shares. If the bears are caught pressing their bets into a strong quarter, then shares of PRLB could explode higher post-earnings as the shorts rush to cover some of their bets.

From a technical perspective, PRLB 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 $39.64 to its recent high of $67.40 a share. During that move, shares of PRLB have been making mostly higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of PRLB within range of triggering a major breakout trade post-earnings.

If you're in the bull camp on PRLB, then I would wait until after its report and look for long-biased trades if this stock manages to break out above its all-time high at $67.40 a share (or its intraday high on Wednesday if greater) with high volume. Look for volume on that move that hits near or above its three-month average action of 427,395 shares. If that breakout triggers, then PRLB will set up to enter new all-time high territory, which is bullish technical price action. Some possible upside targets off that breakout are $75 to $85 a share.

I would simply avoid PRLB or look for short-biased trades if after earnings it fails to trigger that breakout and then drops back below some key near-term support levels at $62.50 to $61.46 a share with high volume. If we get that move, then PRLB will set up to re-test or possibly take out its 50-day moving average of $60.31 a share. Any high-volume move below that level will then put $57 to $55 into range for shares of PRLB.

Auxilium Pharmaceuticals

One potential earnings short-squeeze candidate is biotechnology player Auxilium Pharmaceuticals (AUXL), which is set to release numbers on Thursday before the market open. Wall Street analysts, on average, expect Auxilium Pharmaceuticals to report revenue of $91.43 million on a loss of 3 cents per share.

During the last quarter, this company reported revenue of $66.2 million and GAAP reported sales were 10% lower than the prior-year quarter's $73.6 million. Also during the last quarter, this company reported non-GAAP EPS of -12 cents per share and GAAP EPS of -17 cents per share.

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The current short interest as a percentage of the float for Auxilium Pharmaceuticals is pretty high at 11.1%. That means that out of the 39.84 million shares in the tradable float, 5.14 million shares are sold short by the bears. This is a decent short interest on a stock with a relatively low tradable float. If the bulls get the earnings news they're looking for, then shares of AUXL could easily rip higher post-earnings as the bears rush to cover some of their short bets.

From a technical perspective, AUXL 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 three months, with shares soaring higher from its low of $13.87 to its intraday high of $18.42 a share. During that uptrend, shares of AUXL have been consistently making higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of AUXL within range of triggering a major breakout trade post-earnings.

If you're bullish on AUXL, then I would wait until after its report and look for long-biased trades if this stock manages to break out above some key overhead resistance levels at $18.50 to $19.60 a share with high volume. Look for volume on that move that registers near or above its three-month average action of 834,059 shares. If that breakout hits, then AUXL will set up to re-test or possibly take out its next major overhead resistance levels at $23 to $25 a share, or even $29 a share.

I would avoid AUXL or look for short-biased trades if after earnings it fails to trigger that breakout and then drops back below its 200-day moving average at $17.63 a share with high volume. If we get that move, then AUXL will set up to re-test or possibly take out its 50-day moving average of $16.70 a share. Any high-volume move below that level will then put its next major support levels at $16 to $15 into range for shares of AUXL.

Skullcandy

Another earnings short-squeeze prospect is Skullcandy (SKUL), a designer, marketer and distributor of performance audio and gaming headphones, which is set to release numbers on Thursday after the market close. Wall Street analysts, on average, expect Skullcandy to report revenue of $55.81 million on a loss of 3 cents per share.

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The current short interest as a percentage of the float for Skullcandy is pretty high at 9.5%. That means that out of the 17.66 million shares in the tradable float, 1.58 million shares are sold short by the bears. This is a decent short interest on a stock with a very low tradable float. Any bullish earnings news could easily spark a monster short-squeeze for shares of SKUL post-earnings.

From a technical perspective, SKUL is currently trending above its 50-day moving average and well below its 200-day moving average, which is neutral trendwise. This stock has been trending sideways and consolidating for the last three months, with shares moving between $5.09 on the downside and $6.10 on the upside. A high-volume move above the upper-end of its recent range post-earnings could spark a large breakout trade for shares of SKUL.

If you're bullish on SKUL, 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 $5.85 to $5.98 a share and then once it takes out more resistance at $6.10 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 396,556 shares. If that breakout triggers, then SKUL will set up to re-fill some of its previous gap down zone from March that started at $7. Any high-volume move above $7 will then put $8 to $9 into range for shares of SKUL.

I would avoid SKUL 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 $5.57 a share with high volume. If we get that move, then SKUL will set up to re-test or possibly take out its next major support levels at $5.20 to $5.09 a share. Any high-volume move below those levels will then put its 52-week low at $4.80 into range for shares of SKUL.

LifeLock

My final earnings short-squeeze play today is identity theft protection services player LifeLock (LOCK), which is set to release numbers on Wednesday after the market close. Wall Street analysts, on average, expect LifeLock to report revenue of $85.32 million on earnings of 1 cent per share.

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The current short interest as a percentage of the float for LifeLock is very high at 14.8%. That means that out of the 49.39 million shares in the tradable float, 5.95 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 35.8%, or by about 1.57 million shares. If the bears are caught pressing their bets into a bullish quarter, then shares of LOCK could easily explode higher post-earnings.

From a technical perspective, LOCK 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, with shares moving between $10.50 on the downside and $11.88 on the upside. A high-volume move above the upper-end of its recent range could trigger a major breakout trade for shares of LOCK post-earnings.

If you're in the bull camp on LOCK, 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 $11.33 to $11.56 a share and then once it takes out more resistance at $11.88 a share with high volume. Look for volume on that move that hits near or above its three-month average volume of 851,192 shares. If that breakout triggers, then LOCK will set up to re-test or possibly take out its all-time high of $12.49 a share. Any high-volume move above that level will then give LOCK a chance to tag $14 to $15 a share.

I would avoid LOCK or look for short-biased trades if after earnings it fails to trigger that breakout and then drops back below some key near-term support levels at $10.59 to $10.49 a share with high volume. If we get that move, then LOCK will set up to re-test or possibly take out its next major support levels at $9.50 to $8.75 a share.

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.