Stock Quotes in this Article: AMD, ISRG, OSTK, SLM, SVU

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.

>>5 Stocks Ready to Break Out

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.

>>5 Big Stocks to Trade for Big Gains

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.

Advanced Micro Devices

My first earnings short-squeeze play is global semiconductor player Advanced Micro Devices (AMD), which is set to release numbers on Thursday after the market close. Wall Street analysts, on average, expect Advanced Micro Devices to report revenue of $1.42 billion on earnings of 2 cents per share.

Just recently, Wedbush Securities analyst Betsy Van Hees upgraded shares of Advanced Micro Devices to outperform from neutral, saying AMD's strong position in the gaming console sector will prove a boon for quarter-on-quarter earnings and revenue growth. "We believe AMD is back on track to deliver solid quarter-over-quarter and year-over-year earnings and revenue growth, Hees said. She raised her price target on the stock to $5 from $4.50.

>>3 Tech Stocks Rising on Big Volume

The current short interest as a percentage of the float Advanced Micro Devices is extremely high at 17.8%. That means that out of the 503.50 million shares in the tradable float, 108.70 million shares are sold short by the bears. If the bulls get the earnings news they're looking for, then shares of AMD could easily skyrocket higher post-earnings as the bears rush to cover some of their bets.

From a technical perspective, AMD is currently trending above both its 50-day and 200-day moving averages, which is bullish. This stock has recently started to bounce higher right off its 50-day moving average of $3.72 a share with strong upside volume flows. That move has now pushed shares of AMD back above some key near-term overhead resistance levels at $3.95 to $4 a share.

If you're bullish on AMD, then I would wait until after its report and look for long-biased trades if this stock manages to break out above some past overhead resistance at $4.25 a share with high volume. Look for volume on that move that registers near or above its three-month average action of 29.28 million shares. If that breakout triggers, then AMD will set up to re-fill its previous gap down zone from July that started at $4.65 a share. Any high-volume move above $4.65 will then give AMD a chance to tag $5 to $6, or even $6.50 a share.

I would simply avoid AMD 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 $3.72 a share to more support at $3.55 a share with high volume. If we get that move, then AMD will set up to re-test or possibly take out its next major support levels at its 200-day moving average of $3.33 a share to more support at $3.25 a share.

Overstock.com

Another potential earnings short-squeeze trade is online retailer Overstock.com (OSTK), which is set to release its numbers on Thursday before the market open. Wall Street analysts, on average, expect Overstock.com to report revenue of $301.29 million on earnings of 15 cents per share.

>>5 Rocket Stocks to Buy This Earnings Season

The current short interest as a percentage of the float for Overstock.com is pretty high at 10.9%. That means that out of the 14.71 million shares in the tradable float, 1.61 million shares are sold short by the bears. This is a stock with a pretty high short interest and very low tradable float. Any bullish earnings news could easily spark a monster short squeeze for shares of OSTK post-earnings.

From a technical perspective, OSTK 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 inside of a consolidation pattern for the last two months and change, with shares moving between $26.86 on the downside and $32.21 on the upside. A high-volume move above the upper-end of its recent range could trigger a big breakout trade for shares of OSTK post-earnings.

If you're in the bull camp on OSTK, then I would wait until after its report and look for long-biased trades if this stock manages to take out some near-term overhead resistance levels at $30.82 to $32.31 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 335,132 shares. If that breakout hits, then OSTK will set up to re-test or possibly take out its 52-week high at $35.60 a share. Any high-volume move above that level will then give OSTK a chance to tag $40 a share.

I would simply avoid OSTK 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 $28 to $26.86 a share with high volume. If we get that move, then OSTK will set up to re-test or possibly take out its next major support levels at $24 to its 200-day moving average at $22.38 a share.

Intuitive Surgical

One potential earnings short-squeeze candidate is advanced medical equipment maker Intuitive Surgical (ISRG), which is set to release numbers on Thursday after the market close. Wall Street analysts, on average, expect Intuitive Surgical to report revenue of $525.96 million on earnings of $3.40 per share.

>>5 Stocks With Breakout Potential

The current short interest as a percentage of the float for Intuitive Surgical is notable at 5%. That means that out of the 39.08 million shares in the tradable float, 1.96 million shares are sold short by the bears. If the bulls get the earnings news they're looking for, then shares of ISRG could easily rip sharply higher post-earnings as the shorts rush to cover some of their bets.

From a technical perspective, ISRG is currently trending above its 50-day moving average and well below its 200-day moving average, which is neutral trendwise. This stock recently spiked higher back above its 50-day at $381.33 a share with strong upside volume flows. That move is quickly pushing shares of ISRG within range of triggering a big breakout trade post-earnings.

If you're bullish on ISRG, 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 $405.45 a share with high volume. Look for volume on that move that registers near or above its three-month average action of 586,225 shares. If that breakout triggers, then ISRG will set up re-fill its previous gap down zone from July that started just under $430 a share. Any high-volume move above $430 to $432.50 will then give ISRG a chance to re-fill some of an even bigger gap down zone from July that started at $500 a share.

I would avoid ISRG or look for short-biased trades if after earnings it fails to trigger that move and then drops back below its 50-day moving average at $381.34 a share with high volume. If we get that move, then ISRG will set up to re-test or possibly take out its next major support levels at $358.02 to its 52-week low at $357.02 a share.

Supervalu

Another earnings short-squeeze prospect is grocery store player Supervalu (SVU), which is set to release numbers on Thursday before the market open. Wall Street analysts, on average, expect Supervalu to report revenue of $3.88 billion on earnings of 10 cents per share.

>>5 Stocks Under $10 Set to Soar

The current short interest as a percentage of the float for Supervalu is very high at 16.8%. That means that out of the 197.07 million shares in the tradable float 33.59 million shares are sold short by the bears. If this company can deliver the numbers the bulls are looking for, then shares of SVU could easily explode higher post-earnings as the shorts jump to cover some of their bets.

From a technical perspective, SVU 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 $4.93 to its recent high of $8.48 a share. During that uptrend, shares of SVU have been consistently making higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of SVU within range of triggering a big breakout trade post-earnings.

If you're bullish on SVU, then I would wait until after its report and look for long-biased trades if this stock manages to break out above its 52-week high at $8.48 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 4.37 million shares. If that breakout hits, then SVU will set up to enter new 52-week-high territory, which is bullish technical price action. Some possible upside targets off that breakout are $11 to $12 a share.

I would avoid SVU or look for short-biased trades if after earnings it fails to trigger that breakout and drops back below its 50-day moving average at $7.71 a share and then below more near-term support levels at $7.55 to $7.30 a share with high volume. If we get that move, then SVU will set up to re-test or possibly take out its next major support levels at $7 to $6 a share.

SLM

My final earnings short-squeeze play is persona loan player SLM (SLM), which is set to release numbers on Wednesday after the market close. Wall Street analysts, on average, expect SLM Corp to report revenue of $673.67 million on earnings of 59 cents per share.

The current short interest as a percentage of the float for SLM Corp sits at 3.3%. That means that out of the 407.72 million shares in the tradable float, 14.22 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 35.2%, or by about 3.70 million shares. If the bears get caught pressing their bets into a bullish quarter, then shares of SLM could easily spike sharply higher post-earnings as the bears rush to cover some of their bets.

From a technical perspective, SLM is currently trending above both its 50-day and 200-day moving averages, which is bullish. This stock has been uptrending strong over the last four months and change, with shares moving higher from its low of $21.76 to its recent high of $25.49 a share. During that uptrend, shares of SLM have been consistently making higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of SLM within range of triggering a major breakout trade post-earnings.
If you're in the bull camp on SLM, 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 $25.49 to $25.84 a share and then once it clears its 52-week high at $26.17 a share with high volume. Look for volume on that move that hits near or above its three-month average volume of 2.90 million shares. If that breakout triggers, then SLM will set up to enter new 52-week high territory, which is bullish technical price action. Some possible upside targets off that move are $30 to $35 a share.

I would avoid SLM 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 $24.68 a share, and then below more key near-term support levels at $23.93 to $23.68 a share with high volume. If we get that move, then SLM will set up to re-test or possibly take out its next major support levels at $21.76 to its 200-day moving average at $21.59 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.


RELATED LINKS:







Follow Stockpickr on Twitter and become a fan on Facebook.

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.