Stock Quotes in this Article: AVAV ZLC TFM JOY BRLI

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.

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.

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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.

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

AeroVironment

My first earnings short-squeeze play is unmanned aircraft and efficient energy systems player AeroVironment (AVAV), which is set to release numbers on Tuesday after the market close. Wall Street analysts, on average, expect AeroVironment to report revenue of $43.78 million on a loss of 7 cents per share.

The current short interest as a percentage of the float for AeroVironment is pretty high at 11.6%. That means that out of the 17.70 million shares in the tradable float, 2.24 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 4.7%, or by 99,000 shares. If the bears are caught pressing their bets into a strong quarter, then shares of AVAV could jump sharply higher post-earnings as the bears rush to cover some of their bets.

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From a technical perspective, AVAV is currently trending above both its 50-day and 200-day moving averages, which is bullish. This stock has been trending sideways inside of a consolidation pattern for the last month and change, with shares moving between $23.97 on the upside and $22.08 on the downside. Any high-volume move above the upper-end of its recent range post-earnings could trigger a big breakout trade for shares of AVAV.

If you're bullish on AVAV, 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 $23.43 to $23.97 a share and then once it clears its 52-week high at $24.64 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 213,342 shares. If that breakout triggers, then AVAV will set up to enter new 52-week-high territory, which is bullish technical price action. Some possible upside targets off that breakout are its next major overhead resistance levels at $28 to $32 a share, or even $33 a share.

Zale

Another potential earnings short-squeeze play is fine jewelry retailer Zale (ZLC), which is set to release its numbers Wednesday before the market open. Wall Street analysts, on average, expect Zale to report revenue of $409.04 million on a loss of 33 cents per share.

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The current short interest as a percentage of the float for Zale is notable at 7.8%. That means that out of the 31.97 million shares in the tradable float, 2.49 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 ZLC could easily rip sharply higher post-earnings as the bears move to cover some of their short positions.

From a technical perspective, ZLC is currently trending above both its 50-day and 200-day moving averages, which is bullish. This stock has been trending sideways inside of a consolidation pattern for the last three months, with shares moving between $8 on the downside and $10.49 on the upside. Any high-volume move above the upper end of its recent range post-earnings could trigger a major breakout trade for shares of ZLC.

If you're in the bull camp on ZLC, 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 $9.50 to its 52-week high at $10.49 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 830,678 shares. If that breakout triggers, then ZLC will set up to enter new 52-week high territory, which is bullish technical price action. Some possible upside targets off that breakout are $14 to $15 a share.

I would simply avoid ZLC 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 $8.69 to $7.96 a share with high volume. If we get that move, then ZLC will set up to re-test or possibly take out its next major support levels at $6.50 to its 200-day moving average at $6.05 a share.

Fresh Market

One potential earnings short-squeeze candidate is specialty foods retailer Fresh Market (TFM), which is set to release numbers on Wednesday after the market close. Wall Street analysts, on average, expect Fresh Market to report revenue of $357 million on earnings of 32 cents per share.

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The current short interest as a percentage of the float for Fresh Market is pretty high at 9.4%. That means that out of the 40.11 million shares in the tradable float, 3.75 million shares are sold short by the bears. This is a big 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 TFM could spike sharply higher post-earnings as the bears get squeezed out of some of their short positions.

From a technical perspective, TFM 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 moving higher from its low of $36.51 to its recent high of $57.17 a share. During that uptrend, shares of TFM have been consistently making higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of TFM within range of triggering a near-term breakout trade post-earnings.

If you're bullish on TFM, 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 $57.17 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 481,812 shares. If that breakout triggers, then TFM will set up to re-test or possibly take out its next major overhead resistance levels at $62.48 to its 52-week high at $65.69 a share.

I would avoid TFM 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 its 50-day moving average of $52.95 to $52.81 a share with high volume. If we get that move, then TFM will set up to re-test or possibly take out its next major support levels at its 200-day moving average of $48.56 to $48 a share.

Joy Global

Another earnings short-squeeze prospect is high productivity mining equipment maker Joy Global (JOY), which is set to release numbers on Wednesday before the market open. Wall Street analysts, on average, expect Joy Global to report revenue of $1.18 billion on earnings of $1.36 per share.

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The current short interest as a percentage of the float for Joy Global is extremely high at 17.6%. That means that out of the 105.45 million shares in the tradable float, 18.58 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 14.2%, or by about 2.3 million shares. If the bears are caught pressing their bets into a bullish quarter, then shares of JOY could rip sharply higher post-earnings as the bears jump to cover some of their short positions.

From a technical perspective, JOY is currently trending above its 50-day moving average and below its 200-day moving average, which is neutral trendwise. This stock recently formed a double bottom chart pattern at $47.96 to $47.83 a share. Following that bottom, shares of JOY have started to uptrend and move back above its 50-day moving average. That move has now pushed JOY within range of triggering a near-term breakout trade post-earnings.

If you're bullish on JOY, 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 $54.12 to $55.50 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 1.90 million shares. If that breakout triggers, then JOY will set up to re-test or possibly take out its next major overhead resistance levels at its 200-day moving average of $57 to $59.50. Any high-volume move above those levels will then put its next major overhead resistance levels at $61.50 to $63 into range for shares of JOY.

I would avoid JOY 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 at $50.46 a share to more near-term support at $50.25 share with high volume. If we get that move, then JOY will set up to re-test or possibly take out its double bottom low area at $47.96 to $47.83 a share. If $47.83 a share gets taken out with volume, then JOY will enter new 52-week-low territory, which is bearish technical price action.

Bio-Reference Laboratories

My final earnings short-squeeze play is clinical testing laboratory player Bio-Reference Laboratories (BRLI), which is set to release numbers on Thursday before the market open. Wall Street analysts, on average, expect Bio-Reference Laboratories to report revenue of $183.53 million on earnings of 51 cents per share.

The current short interest as a percentage of the float for Bio-Reference Laboratories is extremely high at 37.4%. That means that out of the 24.45 million shares in the tradable float, 9.17 million shares are sold short by the bears. This is a monster short interest on a stock with a very low tradable float. Any bullish earnings news could easily send shares of BRLI skyrocketing higher post-earnings as the bears rush to cover some of their short positions.

From a technical perspective, BRLI is currently trending above both its 50-day and 200-day moving averages, which is bullish. This stock has been trending range bound for the last two months, with shares moving between $30 on the upside and $25.38 on the downside. Any high-volume move above the upper-end of its recent range post-earnings could trigger a big breakout trade for shares of BRLI.

If you're in the bull camp on BRLI, 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 $28.24 to $30 a share with high volume. Look for volume on that move that hits near or above its three-month average volume of 305,850 shares. If that breakout triggers, then BRLI will set up to re-test or possibly take out its 52-week high at $32.47 to its three-year high at $32.86 a share. Any high-volume move above those levels will then put $35 to $40 into range for shares of BRLI.

I would avoid BRLI 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 $27.46 to its 50-day moving average at $27.31 a share with high volume. If we get that move, then BRLI will set up to re-test or possibly take out its next major support levels at $26 to $25.38 a share. Any high-volume move below those levels will then give BRLI a chance to tag its 52-week low at $23.36 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.