Stock Quotes in this Article: CIEN, LULU, OXM, ZQK, VRA

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.

Ciena

My first earnings short-squeeze play is communications networking equipment, software and services provider Ciena (CIEN), which is set to release numbers on Thursday before the market open. Wall Street analysts, on average, expect Ciena to report revenue of $568.51 million on earnings of 24 cents per share.

Recently, FBR Capital's Scott Thompson reiterated his outperform rating and $30 price target on shares of Ciena. Thompson hiked his revenue estimate for the fourth quarter to $580 million from $568 million and raised his EPS estimate by a penny to 25 cents.

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The current short interest as a percentage of the float Ciena is very high at 18.6%. That means that out of the 93.41 million shares in the tradable float, 19.42 million shares are sold short by the bears. If the bulls get the earnings news they're looking for, then shares of CIEN could easily skyrocket post-earning as the bears rush to cover some of their bets.

From a technical perspective, CIEN 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 uptrending over the last few weeks, with shares moving higher from its low of $21.25 to its recent high of $24 a share. During that uptrend, shares of CIEN have been making mostly higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of CIEN within range of triggering a big breakout trade post-earnings.

If you're bullish on CIEN, 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 $24 to its 50-day moving average of $24.12 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 3.25 million shares. If that breakout hits, then CIEN will set up to re-test or possibly take out its 52-week high at $27.94 a share. Any high-volume move above that level will then give CIEN a chance to trend north of $30 a share.

I would simply avoid CIEN 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 $22.50 to $21.50 a share with high volume. If we get that move, then CIEN will set up to re-test or possibly take out its next major support level at its 200-day moving average of $20.35 a share. Any high-volume move below that level will then give CIEN a chance to tag $19 to $18 a share post-earnings.

Lululemon Athletica

Another potential earnings short-squeeze trade idea is technical athletic apparel designer and retailer Lululemon Athletica (LULU), which is set to release its numbers on Thursday before the market open. Wall Street analysts, on average, expect Lululemon Athletica to report revenue $376.15 million on earnings of 41 cents per share.

Just this morning, Credit Suisse said the new CEO hire at Lululemon Athletica of Laurent Potdevin is a solid one given his strong brand management and consumer engagement. The firm has an outperform rating on the stock and a $78 per share price target.

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The current short interest as a percentage of the float for Lululemon Athletica is very high at 17.8%. That means that out of the 134.39 million shares in the tradable float, 17.81 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 4.2%, or by 739,000 shares. If the bears get caught pressing their bets into a bullish quarter, then shares of LULU could soar sharply higher post-earnings as the bears jump to cover some of their short positions.

From a technical perspective, LULU is currently trending above both its 50-day and 200-day moving averages, which is bullish. This stock has been uptrending for the last month, with shares moving higher from its low of $65.72 to its recent high of $72.22 a share. During that uptrend, shares of LULU have been making mostly higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of LULU within range of triggering a big breakout trade post-earnings.

If you're in the bull camp on LULU, 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 $72.22 to $74 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 2.73 million shares. If that breakout hits, then LULU will set up to re-test or possibly take out its next major overhead resistance level at $77.75 a share. Any high-volume move above $77.75 will then give LULU a chance to re-fill some of its previous gap down zone from June that started at $82.50 a share.

I would simply avoid LULU 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 $68 to $67 a share with high volume. If we get that move, then LULU will set up to re-test or possibly take out its next major support levels at $63.50 to $62 a share. Any high-volume move below those levels will then give LULU a chance to tag $59 to $58 a share.

Oxford Industries

One potential earnings short-squeeze candidate is men's apparel player Oxford Industries (OXM) which is set to release numbers on Wednesday after the market close. Wall Street analysts, on average, expect Oxford Industries to report revenue of $199.55 million on earnings of 11 cents per share.

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The current short interest as a percentage of the float for Oxford Industries is notable at 4.8%. That means that out of the 14.31 million shares in the tradable float, 824,000 shares are sold short by the bears. This stock has a decent short interest combined with a very low tradable float. Any bullish earnings news could easily spark a sharp short-covering rally for shares of OXM post-earnings.

From a technical perspective, OXM 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 six months, with shares moving higher from its low of $57.55 to its recent high of $75.82 a share. During that move, shares of OXM have been consistently making higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of OXM within range of triggering a near-term breakout trade post-earnings.

If you're bullish on OXM, 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 $75.13 to its 52-week high at $75.82 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 65,333 shares. If that breakout hits, then OXM will set up to enter new 52-week high territory, which is bullish technical price action. Some possible upside targets off that breakout are $80 to $85, or even $90 a share.

I would avoid OXM 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 $72.55 to its 50-day moving average at $71.27 a share with high volume. If we get that move, then OXM will set up to re-test or possibly take out its next major support levels $66 to its 200-day moving average at $64.07 a share. Any high-volume move below $64.07 will then give OXM a chance to tag $61 to $60 a share.

Vera Bradley

Another earnings short-squeeze prospect is producer, marketer and retailer of functional accessories for women Vera Bradley (VRA), which is set to release numbers on Wednesday after the market close. Wall Street analysts, on average, expect Vera Bradley to report revenue of $129.27 million on earnings of 33 cents per share.

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The current short interest as a percentage of the float for Vera Bradley is extremely high at 62.1%. That means that out of the 21.57 million shares in the tradable float, 12.92 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 3.1%, or by 400,000 shares. If the bears get caught pressing their bets into a strong quarter, then shares of VRA could explode sharply higher post-earnings as the bears rush to cover some of their short bets.

From a technical perspective, VRA is currently trending above both its 50-day and 200-day moving averages, which is bullish. This stock has been uptrending over the last three months, with shares moving higher from its low of $17.27 to its recent high of $25.72 a share. During that move, shares of VRA have been making mostly higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of VRA within range of triggering a big breakout trade post-earnings.
If you're bullish on VRA, 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 $25.25 to $25.72 a share, and then once it takes out its 52-week high at $27.15 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 531,823 shares. If that breakout hits, then VRA will set up to enter new 52-week high territory, which is bullish technical price action. Some possible upside targets off that breakout are $34 to $35 a share.
I would simply avoid VRA or look for short-biased trades if after earnings it fails to trigger that breakout, and then drops back below both its 50-day at $22.82 and its 200-day at $22.31 a share high volume. If we get that move, then VRA will set up to re-test or possibly take out its next major support levels at $20 to $19 a share. Any high-volume move below those levels will then give VRA a chance to tag its 52-week low at $17.27 a share.

Quiksilver

My final earnings short-squeeze play is men's sports clothing player Quiksilver (ZQK), which is set to release numbers on Thursday after the market close. Wall Street analysts, on average, expect Quiksilver to report revenue of $516.19 million on earnings of 4 cents per share.

The current short interest as a percentage of the float for Quiksilver is very high at 16.3%. That means that out of the 118.02 million shares in the tradable float, 18.21 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 3.3%, or by 608,000 shares. If the bears get caught pressing their bets into a bullish quarter, then shares of ZQK could rip sharply higher post-earnings as the bears jump to cover some of their short positions.

From a technical perspective, ZQK is currently trending above both its 50-day and 200-day moving averages, which is bullish. This stock has been uptrending for the last three months and change, with shares soaring higher from its low of $4.81 to its recent high of $9.29 a share. During that uptrend, shares of ZQK have been making mostly higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of ZQK within range of triggering a big breakout trade post-earnings.

If you're in the bull camp on ZQK, 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 $8.96 to its 52-week high at $9.29 a share with high volume. Look for volume on that move that hits near or above its three-month average volume of 1.68 million shares. If that breakout hits, then ZQK will set up to enter new 52-week high territory, which is bullish technical price action. Some possible upside targets off that breakout are $12 to $13, or even $15 a share.

I would avoid ZQK or look for short-biased trades if after earnings it fails to trigger that breakout and then drops back below its 50-day at $8.01 a share to more near-term support levels at $7.85 to $7.33 a share with high volume. If we get that move, then ZQK will set up to re-test or possibly take out its next major support level at its 200-day moving average of $6.86 a share to more support at $6.50 a share. Any high-volume move below $6.50 to $6 will then give ZQK a chance to re-fill a previous gap up zone from September that started at $5.25 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.