Stock Quotes in this Article: ADI, GLNG, TIVO, BLOX, TLYS

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 Poised for Breakouts

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.

>>5 Rocket Stocks for Turkey Day Trading

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.

>>5 Stocks Under $10 Set to Soar

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

Infoblox

My first earnings short-squeeze play is automated network controller player Infoblox (BLOX), which is set to release numbers on Tuesday after the market close. Wall Street analysts, on average, expect Infoblox to report revenue of $63.50 million on earnings of 9 cents per share.

Just recently, Needhamanalyst Alex Henderson raised his price target on shares of Infoblox to $49 from $47 ahead of the quarter, saying he expects the company to post another 20%-plus quarterly sales gain when it reports. "We expect Infoblox to report another strong quarter, with strong revenue growth, firm gross margins and expanding operating margins," Henderson wrote in a research report.

>>3 Stocks Spiking on Big Volume

The current short interest as a percentage of the float Infoblox is stands at 4.3%. That means that out of the 47.38 million shares in the tradable float, 1.89 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 8.5%, or by about 148,000 shares. If the bears get caught pressing their bets into a bullish quarter, then shares of BLOX could rip sharply higher post-earnings as the bears rush to cover some of their short positions.

From a technical perspective, BLOX is currently trending above both its 50-day and 200-day moving averages, which is bullish. This stock has just started to trend back above its 50-day moving average of $43.17 a share. That move is quickly pushing shares of BLOX within range of triggering a big breakout trade post-earnings.

If you're bullish on BLOX, 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 $46.30 to its all-time high at $48.97 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 786,755 shares. If that breakout hits, then BLOX will set up to enter new all-time-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 BLOX or look for short-biased trades if after earnings it fails to trigger that breakout and then drops back below a key near-term support level at $39.81 a share with high volume. If we get that move, then BLOX will set up to re-test or possibly take out its next major support levels at $37.26 to $34 a share. Any high-volume move below those levels will then put its 200-day moving average at $30.99 into range for shares of BLOX.

Golar LNG

Another potential earnings short-squeeze trade idea is Golar LNG (GLNG), a midstream liquefied natural gas company engaged in the transportation, regasification and liquefaction, and trading of LNG. Golar LNG is set to release its numbers on Wednesday before the market open. Wall Street analysts, on average, expect the company to report revenue $16.87 million on earnings of 8 cents per share.

>>5 Big Trades to Take for a Fed Taper

The current short interest as a percentage of the float for Golar LNG is pretty high at 10.8%. That means that out of the 79.62 million shares in the tradable float, 4.60 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 10.3%, or by about 429,000 shares. If the bears get caught pressing their bets into a bullish quarter, then shares of GLNG could surge sharply higher post-earnings as the shorts jump to cover some of their trades.

From a technical perspective, GLNG is currently trending below its 50-day moving average and just above its 200-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 $40.37 to its intraday low of $36.21 a share. During that move, shares of GLNG have been consistently making lower highs and lower lows, which is bearish technical price action.

If you're in the bull camp on GLNG, 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 $37.52 a share to more near-term resistance at $38 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 559,383 shares. If that breakout hits, then GLNG will set up to re-test or possibly take out its 52-week high at $41.55 a share. Any high-volume move above that level will then give GLNG a chance to tag $45 a share post-earnings.

I would simply avoid GLNG 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 $35.62 a share to more near-term support at $34 a share with high volume. If we get that move, then GLNG will set up to re-test or possibly take out its next major support levels at $32 to $30 a share.

TiVo

One potential earnings short-squeeze candidate is developer and provider of DVR set-top boxes Tivo (TIVO), which is set to release numbers on Tuesday after the market close. Wall Street analysts, on average, expect Tivo to report revenue of $81.33 million on earnings of 6 cents per share.

This company reported a profit last quarter, after registering two straight quarters of losses.

>>4 Stocks Breaking Out on Unusual Volume

The current short interest as a percentage of the float for TiVo is notable at 5.1%. That means that out of the 118.13 million shares in the tradable float, 6.01 million shares are sold short by the bears. If this company can deliver the earnings news the bulls are looking for, then shares of TIVO could rip sharply higher post-earnings as the shorts jump to cover some of their positions.

From a technical perspective, TIVO 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 $13 on the downside and $14.25 on the upside. Any high-volume move above the upper-end of its range post-earnings could trigger a big breakout trade for shares of TIVO.

If you're bullish on TIVO, 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 $13.72 to $13.91 a share, and then once it clears its 52-week high at $14.25 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 2.81 million shares. If that breakout hits, then TIVO will set up to enter new 52-week-high territory, which is bullish technical price action. Some possible upside targets off that breakout are $17 to $20 a share.

I would avoid TIVO 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 $13 to its 50-day moving average of $12.96 a share with high volume. If we get that move, then TIVO will set up to re-test or possibly take out its next major support levels at its 200-day moving average of $12.11 to $11 a share.

Tilly's

Another earnings short-squeeze prospect is specialty retailer of West Coast apparel, footwear and accessories Tilly's (TLYS), which is set to release numbers on Tuesday after the market close. Wall Street analysts, on average, expect Tilly's to report revenue of $132.59 million on earnings of 21 cents per share.

>>5 Retail Trades to Take Before Black Friday

The current short interest as a percentage of the float for Tilly's is notable a 3.2%. That means that out of the 10.28 million shares in the tradable float, 324,000 shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 2.3%, or by about 7,000 shares. If the bears get caught pressing their bets into a strong quarter, then shares of TLYS could rip sharply higher post-earnings as the shorts rush to cover some of their bets.

From a technical perspective, TLYS 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 $12.44 to its recent high of $15.80 a share. During that uptrend, shares of TLYS have been consistently making higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of TLYS within range of triggering a big breakout trade post-earnings.

If you're bullish on TLYS, 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 $15.67 to $15.80 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 49,179 shares. If that breakout hits, then TLYS will set up to re-test or possibly take out its next major overhead resistance levels at its 52-week high at $17.35 a share to its all-time high at $19.57 a share.

I would simply avoid TLYS 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 of $14.68 a share with high volume. If we get that move, then TLYS will set up to re-test or possibly take out its next major support levels at $14 to $13.50 a share. Any high-volume move below those levels will then put its next major support level at $12.44 into range for shares of TLYS.

Analog Devices

My final earnings short-squeeze play is semiconductor player Analog Devices (ADI), which is set to release numbers on Tuesday after the market close. Wall Street analysts, on average, expect Analog Devices to report revenue of $688.46 million on earnings of 58 cents per share.

This company has been profitable over the last eight quarters, but it has seen net income drop over the past four quarters by an average of 2% year over year. The worst quarter was the first quarter, which saw a 6% drop in net income.

The current short interest as a percentage of the float for Analog Devices stands at 1.7%. That means that out of the 307.38 million shares in the tradable float, 5.18 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 1.9%, or by about 95,000 shares. If the bears get caught pressing their bets into a strong quarter, then shares of ADI could easily spike sharply higher post-earnings as the shorts rush to cover some of their positions.

From a technical perspective, ADI 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 two months, with shares moving higher from its low of $45.28 to its recent high of $50.79 a share. During that uptrend, shares of ADI have been consistently making higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of ADI within range of triggering a big breakout trade post-earnings.

If you're in the bull camp on ADI, 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 $50.79 a share with high volume. Look for volume on that move that hits near or above its three-month average volume of 1.74 million shares. If that breakout hits, then ADI 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 avoid ADI 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 $48.80 a share to its 50-day moving average of $48.22 a share with high volume. If we get that move, then ADI will set up to re-test or possibly take out its next major support levels at its 200-day moving average of $46.34 to $45 a share. Any high-volume move below those levels will then put $43.50 to $41 into range for shares of ADI.

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.