Stock Quotes in this Article: APOG, ARWR, FDS, LEN, SAFM

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.

FactSet Research Systems

My first earnings short-squeeze trade idea is FactSet Research Systems (FDS), an integrated financial information and analytical applications provider to the global investment community, which is set to release numbers on Tuesday before the market open. Wall Street analysts, on average, expect FactSet Research Systems to report revenue of $223.66 million on earnings of $1.24 per share.

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The current short interest as a percentage of the float FactSet Research Systems is pretty high at 13.6%. That means that out of the 39.98 million shares in the tradable float, 5.63 million shares are sold short by the bears. This is a high short interest on a stock with a relatively low tradable float. Any bullish earnings news could easily spark a large short-covering rally for shares of FDS post-earnings.

From a technical perspective, FDS 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 and change, with shares soaring higher from its low of $100.76 to its intraday high of $119.08 a share. During that move, shares of FDS have been making mostly higher lows and higher highs, which is bullish technical price action.

If you're bullish on FDS, then I would wait until after its report and look for long-biased trades if this stock manages to take out its 52-week high at $119.08 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 302,936 shares. If we get that move post-earnings, then FDS will set up to enter new 52-week-high territory, which is bullish technical price action. Some possible upside targets off that move are $130 to $135 a share.

I would simply avoid FDS or look for short-biased trades if after earnings it fails to trigger that move and then drops back below some key near-term support levels at $114 a share to its 50-day moving average at $111.05 a share with high volume. If we get that move, then FDS will set up to re-test or possibly take out its next major support levels at $108 to $107 a share, or its 200-day moving average at $103.37 a share.

Arrowhead Research

Another potential earnings short-squeeze play is nanomedicine player Arrowhead Research (ARWR), which is set to release its numbers on Wednesday after the market close. Wall Street analysts, on average, expect Arrowhead Research to report revenue of $530,000.

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The current short interest as a percentage of the float for Arrowhead Research is pretty high at 9.4%. That means that out of the 20.01 million shares in the tradable float, 1.59 million shares are sold short by the bears. This is a high 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 ARWR could easily explode higher post-earnings as the bears rush to cover some of their short positions.

From a technical perspective, ARWR 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 moving higher from its low of $1.81 to its recent high of $9.30 a share. During that uptrend, shares of ARWR have been consistently making higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of ARWR within range of triggering a big breakout trade post-earnings.

If you're in the bull camp on ARWR, 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 $9.30 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 554,658 shares. If that breakout hits, then ARWR will set up to enter new 52-week high territory, which is bullish technical price action. Some possible upside targets off that breakout are $11 to $12 a share.

I would simply avoid ARWR 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 its 50-day moving average of $7.70 a share to more support at $7 share with high volume. If we get that move, then ARWR will set up to re-test or possibly take out its next major support levels at $6 to $5.45 a share.

Lennar

Another potential earnings short-squeeze candidate is homebuilder Lennar (LEN), which is set to release numbers on Wednesday before the market open. Wall Street analysts, on average, expect Lennar to report revenue of $1.56 billion on earnings of 45 cents per share.

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The current short interest as a percentage of the float Lennar is extremely high at 20.4%. That means that out of the 167.62 million shares in the tradable float, 39.97 million shares are sold short by the bears. If this company can report a solid quarter that pleases the bulls, then shares of LEN could easily rip sharply higher post-earnings as the bears jump to cover some of their bets.

From a technical perspective, LEN is currently trending just above its 50-day moving average and below its 200-day moving average, which is neutral trendwise. This stock has been trending sideways for the last two months and change, with shares moving between $32.15 on the downside and $37.79 on the upside. Any high-volume move above the upper-end of that range post-earnings could trigger a big breakout trade for shares of LEN.

If you're bullish on LEN, 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 $36.61 to $37.79 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 5.29 million shares. If that breakout hits, then LEN will set up to re-test or possibly take out its next major overhead resistance levels at $40 to $44 a share. Any high-volume move above $44.40 will then give LEN a chance to enter new 52-week high-territory, which is bullish technical price action.

I would avoid LEN 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 $34.56 to $34.09 a share with high volume. If we get that move, then LEN will set up to re-test or possibly take out its next major support levels $32.15 to its 52-week low at $30.90 a share.

Sanderson Farms

Another earnings short-squeeze prospect is poultry processing player Sanderson Farms (SAFM), which is set to release numbers on Tuesday before the market open. Wall Street analysts, on average, expect Sanderson Farms to report revenue of $714.38 million on earnings of $2.15 per share.

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Back in late October, Stephens downgraded shares of Sanderson Farms due to falling chicken prices, especially in leg quarters, and higher feed costs. The firm lowered its price target to $65 from $81 per share.

The current short interest as a percentage of the float for Sanderson Farms is notable at 7.7%. That means that out of the 20.24 million shares in the tradable float, 1.44 million shares are sold short by the bears. This is a decent short interest on a stock with a very low tradable float. Any bullish earnings news could easily spark a large short-squeeze for shares of SAFM post-earnings.

From a technical perspective, SAFM is currently trending above both its 50-day and 200-day moving averages, which is bullish. This stock has been uptrending over the last two months, with shares moving higher from its low of $59.77 to its intraday high of $71.34 a share. During that uptrend, shares of SAFM have been making mostly higher lows and higher highs, which is bullish technical price action.

If you're bullish on SAFM, then I would wait until after its report and look for long-biased trades if this stock manages to take out Monday's intraday high of $71.34 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 208,948 shares. If we get that move, then SAFM will set up to re-test or possibly take out its 52-week high at $75.30 a share. Any high-volume move above $75.30 will then give SAFM a chance to trend north of $80 a share.

I would simply avoid SAFM 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 at $67.22 a share, and then below both its 50-day at $65.95 and its 200-day at $64.75 a share high volume. If we get that move, then SAFM will set up to re-test or possibly take out its next major support levels at $62 to $59.77 a share.

Apogee Enterprises

My final earnings short-squeeze play is Apogee Enterprises (APOG), a designer and developer of valued-added glass products, services and systems, which is set to release numbers on Wednesday after the market close. Wall Street analysts, on average, expect Apogee Enterprises to report revenue of $202.59 million on earnings of 35 cents per share.

The current short interest as a percentage of the float for Apogee Enterprises stands at 4.6%. That means that out of the 27.95 million shares in the tradable float, 1.24 million shares are sold short by the bears. If the bulls can get the earnings news they're looking for, then shares of APOG could experience a sizeable short-covering rally post-earning as the bears rush to cover some of their short positions.

From a technical perspective, APOG 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 $22.06 to its recent high of $36.49 a share. During that uptrend, shares of APOG have been consistently making higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of APOG within range of triggering a big breakout trade post-earnings.

If you're in the bull camp on APOG, 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 $36.49 a share with high volume. Look for volume on that move that hits near or above its three-month average volume of 213,441 shares. If that breakout hits, then APOG will set up to enter new 52-week high territory, which is bullish technical price action. Some possible upside targets off that breakout are $45 to $50 a share.

I would avoid APOG 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 $34.50 to $34.07 a share, and then once it takes out its 50-day moving average at $32.97 a share with high volume. If we get that move, then APOG will set up to re-test or possibly take out its next major support levels at $30 to its 200-day moving average at $28.47 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.