Stock Quotes in this Article: AFCE, CAAS, MBI, NQ, KYTH

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.

NQ Mobile

My first earnings short-squeeze play is global mobile Internet services provider NQ Mobile (NQ), which is set to release numbers on Tuesday after the market close. Wall Street analysts, on average, expect NQ Mobile to report revenue of $51.20 million on earnings of 28 cents per share.

Just this morning, news broke that investment firm Toro Investment has acquired a 5% stake in NQ Mobile and sought to refute allegations against the company. The firm wrote that after visiting China and conducting due diligence on NQ Mobile there, none of short-selling firm Muddy Waters' six major claims against the company have any merit.

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The current short interest as a percentage of the float NQ Mobile is extremely high at 44.2%. That means that out of the 33.51 million shares in the tradable float, 12.53 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 6.5%, or by 820,000 shares. If the bears are caught pressing their bets into a bullish quarter, then shares of NQ could explode sharply higher post-earnings.

From a technical perspective, NQ is currently trending above its 200-day moving average and below its 50-day moving average, which is neutral trendwise. This stock has just started to trend back above its 200-day moving average of $12.15 a share, after dropping from $15.85 to $9.32 a share. That move is starting to push shares of NQ within range of triggering a big breakout trade post-earnings.

If you're bullish on NQ, 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 $15.85 a share to its 50-day moving average of $18.59 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 6.69 million shares. If that breakout hits, then NQ will set up to re-test or possibly take out its next major overhead resistance levels at $24 to its 52-week high at $25.90 a share.

I would simply avoid NQ 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 $12.15 share with high volume. If we get that move, then NQ will set up to re-test or possibly take out its next major support levels at $9.32 to $7.58 a share.

Kythera Biopharmaceuticals

Another potential earnings short-squeeze trade idea is Kythera Biopharmaceuticals (KYTH), a clinical-stage biopharmaceutical company focused on the discovery, development, and commercialization of prescription products for the aesthetic medicine market. Kythera is set to release its numbers on Thursday before the market open. Wall Street analysts, on average, expect it to report a loss of 72 cent per share.

Just recently, FBR Capital initiated coverage on shares of Kythera Biopharmaceuticals with an outperform rating and a price target of $58 per share.

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The current short interest as a percentage of the float for Kythera Biopharmaceuticals is pretty high at 15.8%. That means that out of the 11.82 million shares in the tradable float, 1.82 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 10.1%, or by about 183,000 shares. If the bears are caught pressing their bets into a strong quarter, then shares of KYTH could rip sharply higher post-earnings as the shorts rush to cover some of their bets.

From a technical perspective, KYTH 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 downtrending for the last few weeks, with shares moving lower from its high of $46.99 to its recent low of $37.28 a share. During that move, shares of KYTH have been consistently making lower highs and lower lows, which is bearish technical price action. That said, shares of KYTH have now started to bounce off that $37.28 low and it's quickly moving within range of triggering a near-term breakout trade.

If you're in the bull camp on KYTH, then I would wait until after its report and look for long-biased trades if this stock manages to break out above its 50-day moving average of $41.49 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 249,311 shares. If that breakout hits, then KYTH will set up to re-test or possibly take out its next major overhead resistance levels at $45 to $46.99 a share, or even its all-time high at $47.85 a share. If those levels get taken out with volume, then KYTH could easily trend well north of $50 a share.

I would simply avoid KYTH 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 $37.50 to $37.28 a share with high volume. If we get that move, then KYTH will set up to re-test or possibly take out its next major support levels at $32.50 a share to its 200-day moving average of $28.82 a share.

MBIA

One potential earnings short-squeeze candidate is financial guarantee insurance player MBIA (MBI), which is set to release numbers on Tuesday after the market close. Wall Street analysts, on average, expect MBIA to report revenue of $91.45 million on a loss of 3 cents per share.

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The current short interest as a percentage of the float for MBIA is very high at 14.5%. That means that out of the 142.22 million shares in the tradable float, 17.77 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 12.5%, or by about 2.22 million shares. If the bears are caught pressing their bets into a bullish quarter, then shares of MBI could spike sharply higher post-earnings.

From a technical perspective, MBI 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 strong for the last month, with shares moving higher from its low of $9.58 to its intraday high of $12 a share. During that uptrend, shares of MBI have been consistently making higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of MBI within range of triggering a big breakout trade.

If you're bullish on MBI, 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 $12 to $12.61 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 2.88 million shares. If that breakout hits, then MBI will set up to re-test or possibly take out its next major overhead resistance levels at $14.10 to its 52-week high at $16.15 a share.

I would avoid MBI 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 $11.13 a share to more key support levels at $10.98 to $10.60 a share with high volume. If we get that move, then MBI will set up to re-test or possibly take out its next major support levels at $9.58 to $8.73 a share.

AFC Enterprises

Another earnings short-squeeze prospect is quick-service restaurant operator AFC Enterprises (AFCE), which is set to release numbers on Wednesday after the market close. Wall Street analysts, on average, expect AFC Enterprises to report revenue of $46.45 million on earnings of 32 cents per share.

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The current short interest as a percentage of the float for AFC Enterprises sits at 2.7%. That means that out of the 21.30 million shares in the tradable float, 625,000 shares are sold short by the bears. This isn't a huge short interest, but it's more than enough to spark a decent short-covering rally if AFC Enterprises can deliver the numbers the bulls are looking for.

From a technical perspective, AFCE 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 $32.05 to its recent high of $45.10 a share. During that uptrend, shares of AFCE have been making mostly higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of AFCE within range of triggering a near-term breakout trade post-earnings.

If you're bullish on AFCE, 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 $45.10 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 154,900 shares. If that breakout triggers, the AFCE will set up to enter new 52-week-high territory, which is bullish technical price action. Some possible upside targets off that breakout are $55 to $60 a share.

I would simply avoid AFCE 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 $43.36 to more support at $41.51 a share with high volume. If we get that move, then AFCE will set up to re-test or possibly take out its next major support levels at $38 to its 200-day moving average of $37.05 a share.

China Automotive Systems

My final earnings short-squeeze play is automotive systems and components maker China Automotive Systems (CAAS), which is set to release numbers on Wednesday after the market close. Wall Street analysts, on average, expect China Automotive Systems to report revenue of $94 million on earnings of 16 cents per share.

The current short interest as a percentage of the float for China Automotive Systems sits at 4.5%. That means that out of the 7.85 million shares in the tradable float, 401,000 shares are sold short by the bears. If the bulls get the earnings news they're looking for, then shares of CAAS could easily spike sharply higher post-earnings as the bears jump to cover some of their bets.

From a technical perspective, CAAS 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 and change, with shares moving between $6.27 on the downside and $8.25 on the upside. Shares of CAAS have just started to spike higher off its 200-day moving average, and it's quickly moving within range of triggering a breakout trade above the upper-end of its recent sideways trading chart pattern.

If you're in the bull camp on CAAS, then I would wait until after its report and look for long-biased trades if this stock manages to break out above its 50-day at $7.29 to more resistance levels at $7.79 to $8.25 a share with high volume. Look for volume on that move that hits near or above its three-month average volume of 139,705 shares. If that breakout hits, then CAAS will set up to re-test or possibly take out its 52-week high at $10.05 a share.

I would avoid CAAS 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 $6.27 to $6.31 a share and then below $5.95 a share with high volume. If we get that move, then CAAS will set up to re-test or possibly take out its next major support levels $5.01 to $4.86 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.