Stock Quotes in this Article: ARO, DMND, FRAN, FIVE, AMBA

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 Breakout Stock Trades for a Santa Claus Rally

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 Stocks Under $10 Set to Soar

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 With Big Insider Buying

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

Aeropostale

My first earnings short-squeeze play is mall-based specialty retailer of casual apparel and accessories Aeropostale (ARO), which is set to release numbers on Wednesday after the market close. Wall Street analysts, on average, expect Aeropostale to report revenue of $520.04 million on a loss of 24 cents per share.

>>3 Stocks Spiking on Unusual Volume

The current short interest as a percentage of the float Aeropostale is extremely high at 30.7%. That means that out of the 51.86 million shares in the tradable float, 19.76 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 10.5%, or by about 2.07 million shares. If the bears get caught pressing their bets into a bullish quarter, then shares of ARO could explode higher as the shorts jump to cover some of their bearish positions.

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

If you're bullish on ARO, 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 $10.35 to $10.68 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 3.28 million shares. If that breakout hits, then ARO will set up to re-test or possibly take out its next major overhead resistance levels at its 200-day moving average of $12.28 to $14, or even $15 a share.

I would simply avoid ARO 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 $9.37 a share with high volume. If we get that move, then ARO will set up to re-test or possibly take out its next major support levels at $8.07 to its 52-week low at $7.78 a share. Any high-volume move below $7.78 will then push shares of ARO into new 52-week-low territory, which is bearish technical price action.

Five Below

Another potential earnings short-squeeze idea is Five Below (FIVE), a retailer of a range of merchandise for teen and pre-teen customers, which is set to release its numbers on Thursday after the market close. Wall Street analysts, on average, expect Five Below to report revenue $111.78 million on earnings of 4 cents per share.

>>5 Rocket Stocks to Buy in December

Just recently, an analyst at Sterne Agee compared items sold in a holiday ad at Five Below to items sold at Amazon.com and Wal-Mart Stores. Five Below's prices were 65% lower than the items sold at Wal-Mart, and Amazon's items were more than 36% higher than the Five Below prices. The analyst rates the stock a buy with a price target of $65 per share.

The current short interest as a percentage of the float for Five Below is very high at 14%. That means that out of the 46.61 million shares in the tradable float, 5.44 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 6.2%, or by about 337,000 shares. If the bears get caught pressing their bets into a strong quarter, then shares of FIVE could spike sharply higher post-earnings as the shorts rush to cover some of their positions.

From a technical perspective, FIVE 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 $36.40 to its recent high of $55.28 a share. During that uptrend, shares of FIVE have been consistently making higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of FIVE within range of triggering a big breakout trade post-earnings.

If you're in the bull camp on FIVE, 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 $54.69 to its all-time high at $55.28 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 936,314 shares. If that breakout hits, then FIVE will set up to enter new all-time high territory, which is bullish technical price action. Some possible upside targets off that breakout are $65 to $70 a share.

I would simply avoid FIVE 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 $49.12 a share with high volume. If we get that move, then FIVE will set up to re-test or possibly take out its net major support levels at $47.13 to $43.26 a share. If those levels get taken out with volume, then FIVE could even re-test or take out its 200-day moving average at $41.39 a share.

Diamond Foods

One potential earnings short-squeeze candidate is packaged food player Diamond Foods (DMND), which is set to release numbers on Thursday after the market close. Wall Street analysts, on average, expect Diamond Foods to report revenue of $237.11 on earnings of 14 cents per share.

>>5 Breakout Trades for the Final Stretch of 2013

The current short interest as a percentage of the float for Diamond Foods is extremely high at 31.2%. That means that out of the 20.23 million shares in the tradable float, 6.35 million shares are sold short by the bears. This is a huge short interest on a stock with a very low tradable float. Any bullish earnings news could easily spark a monster short-squeeze for shares of DMND post-earnings as the bears rush to cover some of their bets.

From a technical perspective, DMND is currently trending above both its 50-day and 200-day moving averages, which is bullish. This stock has been trending sideways and consolidating for the last month, with shares moving between $23.16 on the downside and $25.18 on the upside. Any high-volume move above the upper-end of its recent range post-earnings could trigger a big breakout trade for shares of DMND.

If you're bullish on DMND, 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 $25.07 to $25.18 a share, and then once it clears its 52-week high at $25.32 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 362,300 shares. If that breakout hits, then DMND will set up to enter new 52-week high territory, which is bullish technical price action. Some possible upside targets off that breakout are $30 to $35 a share.

I would avoid DMND 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 $23.30 a share to more near-term support at $23.16 a share with high volume. If we get that move, then DMND will set up to re-test or possibly take out its next major support levels at $20.22 to its 200-day moving average of $19.61 a share.

Ambarella

Another earnings short-squeeze prospect is digital video technology provider Ambarella (AMBA), which is set to release numbers on Thursday after the market close. Wall Street analysts, on average, expect Ambarella to report revenue of $43.98 million on earnings of 29 cents per share per share.

>>4 Stocks Rising on Big Volume

Just this morning, Stifel Nicolaus's Kevin Cassidy reiterated his buy rating on shares of Ambarella, and raised his price target to $27 from $20, citing the company's chips that are driving the analog to digital conversion of security video cameras, widening adoption of sports video cameras and making automotive dashboard videos more practical. Cassidy keeps intact his fiscal 2014 and 2015 estimates, but his new price target is 20 times his estimate for his newly introduced 2016 estimate of $215 million in revenue and $1.36 per share in EPS.

The current short interest as a percentage of the float for Ambarella stands at 7.3%. That means that out of the 19.02 million shares in the tradable float 1.35 million shares are sold short by the bears. This is a decent short interest on a stock with a very low tradable float. If the bulls get the earnings news they're looking for, then shares of AMBA could easily soar higher post-earnings as the bears jump to cover some of their short positions.

From a technical perspective, AMBA 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 $13.16 to its recent high of $25.12 a share. During that uptrend, shares of AMBA have been consistently making higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of AMBA within range of triggering a big breakout trade post-earnings.

If you're bullish on AMBA, then I would wait until after its report and look for long-biased trades if this stock manages to break out above its all-time high at $25.12 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 1.10 shares. If that breakout hits, then AMBA will set up to enter new all-time high territory, which is bullish technical price action. Some possible upside targets off that breakout are $30 to $35, or even $40 a share.

I would simply avoid AMBA 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 $21.31 a share to its 50-day moving average of $21.08 a share with high volume. If we get that move, then AMBA will set up to re-test or possibly take out its next major support levels at $19.20 to $17.55 a share. Any high-volume move below those levels will then put $16.91 to its 200-day moving average of $16.73 into range for shares of AMBA.

Francesca's

My final earnings short-squeeze play is national chain of retail boutiques operator Francesca's (FRAN), which is set to release numbers on Thursday before the market open. Wall Street analysts, on average, expect Francesca's to report revenue of $79.20 million on earnings of 20 cents per share.

>>Timing the Fed's Taper

Just recently, Mizuho initiated coverage on shares of Francesca's with a neutral rating and a price target of $20 per share.

The current short interest as a percentage of the float for Francesca's is very high at 19.2%. That means that out of the 43.27 million shares in the tradable float, 7.93 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 4.9%, or by about 388,000 shares. If the bears get caught pressing their bets into a bullish quarter, then shares of FRAN could jump sharply higher post-earnings as the shorts rush to cover some of their positions.

From a technical perspective, FRAN is currently trending above its 50-day moving average and well below its 200-day moving average, which is neutral trendwise. This stock has been uptrending a bit for the last month and change, with shares moving higher from its low of $16.40 to its recent high of $19.90 a share. During that uptrend, shares of FRAN have been consistently making higher los and higher highs, which is bullish technical price action. That move has now pushed shares of FRAN within range of triggering a major breakout trade post-earnings.

If you're in the bull camp on FRAN, 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 $19.90 $20.24 a share with high volume. Look for volume on that move that hits near or above its three-month average volume of 1.57 million shares. If that breakout hits, then FRAN will set up to re-fill some of its previous gap down zone from September that started near $25 a share. If that gap gets filled with volume, then FRAN could even tag $26 to $28 a share.

I would avoid FRAN 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 $18.44 a share with high volume. If we get that move, then FRAN will set up to re-test or possibly take out its next major support levels at $17.39 to its 52-week low of $16.40 a share. Any high-volume move below $16.40 will then push shares of FRAN into new 52-week low territory, which is bearish technical price action.

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.