Stock Quotes in this Article: HLF, NILE, QCOR, WBMD, WLT

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.

Herbalife

My first earnings short-squeeze play is network marketing and personal products player Herbalife (HLF), which is set to release numbers on Monday after the market close. Wall Street analysts, on average, expect Herbalife to report revenue of $1.19 billion on earnings of $1.14 per share.

If Herbalife can report a 10% growth in earnings for the third quarter, that would extended its streak of double-digit growth for a 16th consecutive quarter. Revenue is projected to rise by 19%, which would be also mark the 16th consecutive quarter of double-digit sales growth.

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The current short interest as a percentage of the float for Herbalife is extremely high at 21.1%. That means that out of the 84.19 million shares in the tradable float, 30.21 million shares are sold short by the bears. If the bulls get the earnings news they're looking for, then this stock could easily see a monster short-squeeze develop post-earnings.

From a technical perspective, HLF is currently trending well below its 200-day moving average and just below its 50-day moving average, which is bearish. This stock has been uptrending modestly for the last month, with shares moving higher from its low of $61.70 to its recent high of $68.60 a share. During that uptrend, shares of HLF have been making mostly higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of HLF within range of triggering a near-term breakout trade post earnings.

If you're bullish on HLF, 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 $68.60 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 3.31 million shares. If that breakout hits, then HLF will set up to re-test or possibly take out its 52-week high at $74.94 a share. Any high-volume move above that level will then give HLF a chance to tag $80 to $90 a share post-earnings.

I would simply avoid HLF 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 $63.07 to $61.70 a share with high volume. If we get that move, then HLF will set up to re-test or possibly take out its next major support levels at $57 to $50 a share.

Questcor Pharmaceuticals

Another potential earnings short-squeeze trade idea is biopharmaceuticals player Questcor Pharmaceuticals (QCOR), which is set to release its numbers on Tuesday after the market close. Wall Street analysts, on average, expect Questcor Pharmaceuticals to report revenue of $199.70 million on earnings of $1.29 per share.

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The current short interest as a percentage of the float for Questcor Pharmaceuticals is very high at 22.3%. That means that out of the 54.61 million shares in the tradable float, 13.05 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 12.6%, or by about 1.45 million shares. If the bears are caught pressing their bets into a bullish quarter, then shares of QCOR could rip sharply higher post-earnings as the bears rush to cover some of their bets.

From a technical perspective, QCOR 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 month, with shares moving higher from its low of $53.09 to its intraday high of $69.40 a share. During that uptrend, shares of QCOR have been making mostly higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of QCOR within range of triggering a near-term breakout trade.

If you're in the bull camp on QCOR, 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 $69.40 a share, and then once it clears its 52-week high at $74.76 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 1.94 million shares. If that breakout triggers, then QCOR 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 simply avoid QCOR 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 $63.32 a share with high volume. If we get that move, then QCOR will set up to re-test or possibly take out its next major support levels at $58 to $53 a share.

Blue Nile

One potential earnings short-squeeze candidate is online retailer of diamonds and jewelry Blue Nile (NILE), which is set to release numbers on Thursday before the market open. Wall Street analysts, on average, expect Blue Nile to report revenue of $99.82 million on earnings of 16 cents per share.

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The current short interest as a percentage of the float for Blue Nile is very high at 17.8%. That means that out of the 11.58 million shares in the tradable float, 2.18 million shares are sold short by the bears. This is a large short interest on a stock with a very low tradable float. Any bullish earnings news could easily spark a big short-squeeze for shares of NILE post-earnings.

From a technical perspective, NILE is currently trending above both its 50-day and 200-day moving averages, which is bullish. This stock has been uptrending for the last few weeks, with shares moving high from its low of $36.56 to its recent high of $40.99 a share. During that uptrend, shares of NILE have been making mostly higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of NILE within range of triggering a near-term breakout trade.

If you're bullish on NILE, 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 $40.99 to $42.34 a share to its 52-week high at $43 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 116,368 shares. If that breakout triggers, then NILE will set up enter new 52-week-high territory, which is bullish technical price action. Some possible upside targets off that breakout are $50 to $60 a share.

I would avoid NILE 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 of $38.73 a share with high volume. If we get that move, then NILE will set up to re-test or possibly take out its next major support levels at its 200-day moving average of $35.86 a share to $34 to $33 a share.

Walter Energy

Another earnings short-squeeze prospect is coal producer and exporter Walter Energy (WLT), which is set to release numbers on Wednesday before the market open. Wall Street analysts, on average, expect Walter Energy to report revenue of $454.81 million on a loss of $1.02 per share.

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The current short interest as a percentage of the float for Walter Energy is extremely high at 33.9%. That means that out of the 59 million shares in the tradable float, 21.06 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 2.1%, or by about 436,000 shares. If the bears are caught pressing their bets into a strong quarter, then shares of WLT could easily rip sharply higher post-earnings as the shorts rush to cover some of their bets.

From a technical perspective, WLT is currently trending above its 50-day moving average and below its 200-day moving average, which is neutral trendwise. This stock has been uptrending strong for the last two months and change, with shares moving higher from its low of $9.96 to its recent high of $16.30 a share. During that uptrend, shares of WLT have been consistently making higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of WLT within range of triggering a big breakout trade post-earnings.

If you're bullish on WLT, 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 $16.29 to $16.30 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 7.77 million shares. If that breakout triggers, then WLT will set up to re-test or possibly take out its next major overhead resistance levels at $20 to $22.50 a share.

I would simply avoid WLT 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 $14.24 a share to more support at $13.50 a share with high volume. If we get that move, then WLT will set up to re-test or possibly take out its next major support levels at $12 to $11.50 a share.

WebMD Health

My final earnings short-squeeze play is online health care information services player WebMD Health (WBMD), which is set to release numbers on Tuesday after the market close. Wall Street analysts, on average, expect WebMD Health to report revenue of $129.74 million on earnings of 9 cents per share.

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The current short interest as a percentage of the float for WebMD Health is pretty high at 9.7%. That means that out of the 42.26 million shares in the tradable float, 4.26 million shares are sold short by the bears. If the bulls get the earnings news they're looking for, then shares of WBMD could spike sharply higher post-earnings as the bears jump to cover some of their bets.

From a technical perspective, WBMD 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 month and change, with shares moving higher from its low of $28.03 to its recent high of $36.22 a share. During that move, shares of WBMD have been making mostly higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of WBMD within range of triggering a big breakout trade post-earnings.

If you're in the bull camp on WBMD, 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 $36.22 a share (or Tuesday's intraday high if greater), and then above some past resistance at $40.24 a share with high volume. Look for volume on that move that hits near or above its three-month average volume of 841,772 shares. If that breakout triggers, then WBMD will set up to enter new 52-week high territory, which is bullish technical price action. Some possible upside targets off that breakout are $48 to $50 a share.

I would avoid WBMD 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 $34 a share with high volume. If we get that move, then WBMD will set up to re-test or possibly take out its next major support levels at its 50-day moving average of $31.65 a share to $30 to $28 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.