Stock Quotes in this Article: BBBY, GPN, PSMT, SVU, EOPN

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 Toxic Stocks to Sell in 2014

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 Poised for Breakouts

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 High-Yield Stocks Ready to Pay You More in 2014

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

E2open

My first earnings short-squeeze play is cloud-based on-demand software solutions provider E2open (EOPN), which is set to release numbers on Thursday after the market close. Wall Street analysts, on average, expect E2open to report revenue of $18.41 million on a loss of 19 cents per share.

>>5 Ways You Can Trade Like a Hedge Fund in 2014

The current short interest as a percentage of the float E2open is very high at 16%. That means that out of the 12.50 million shares in the tradable float, 2.20 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 1.6%, or by around 34,000 shares. If the bears get caught pressing their bets into a strong quarter, then shares of EOPN could easily soar higher post-earnings as the bears rush to cover some of their bets.

From a technical perspective, EOPN is currently trending above both its 50-day and 200-day moving averages, which is bullish. This stock has been uptrending for the last six month, with shares moving higher from its low of $16.80 to its recent high of $26.40 a share. During that uptrend, shares of EOPN have been making mostly higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of EOPN within range of triggering a near-term breakout trade post-earnings.

If you're bullish on EOPN, 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 to its all-time-high at $26.40 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 151,040 shares. If that breakout triggers, then EOPN will set up to enter new all-time-high territory, which is bullish technical price action. Some possible upside targets off that breakout are $35 to $37 a share.

I would simply avoid EOPN 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 $22.88 a share with high volume. If we get that move, then EOPN will set up to re-test or possibly take out its next major support levels at its 200-day moving average of $19.65 to $18.54 a share.

PriceSmart

Another potential earnings short-squeeze trade idea is international membership shopping warehouse club player PriceSmart (PSMT), which is set to release its numbers on Thursday after the market close. Wall Street analysts, on average, expect PriceSmart to report revenue $608.12 million on earnings of 75 cents per share.

>>5 Rocket Stocks to Buy for Repeat Gains in 2014

The current short interest as a percentage of the float for PriceSmart is notable at 6.7%. That means that out of the 23.48 million shares in the tradable float, 1.29 million shares are sold short by the bears. This is a decent short interest on a stock with a relatively low tradable float. Any bullish earnings news could easily spark a sharp short-covering rally for shares of PSMT post-earnings.

From a technical perspective, PSMT 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 over the last month and change, with shares moving lower from its high of $126.64 to its recent low of $110.40 a share. During that downtrend, shares of PSMT have been consistently making lower highs and lower lows, which is bearish technical price action.

If you're in the bull camp on PSMT, 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 $116.95 a share to some more near-term overhead resistance at $120.51 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 133,702 shares. If that breakout hits, then PSMT will set up to re-test or possibly take out its 52-week-high at $126.64 a share. Any high-volume move above that level will then give PSMT a chance to trend north of $130 a share.

I would simply avoid PSMT 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 $110.40 a share with high volume. If we get that move, then PSMT will set up to re-test or possibly take out its next major support levels at $100.31 to its 200-day moving average of $96 a share.

Supervalu

One potential earnings short-squeeze candidate is U.S. grocery channel operator Supervalu (SVU), which is set to release numbers on Thursday before the market open. Wall Street analysts, on average, expect Supervalu to report revenue of $4.05 billion on earnings of 13 cents per share.

Just recently, Goldman Sachs said discount supermarket Aldi's plans to open 650 stores over the next five years is an incremental negative for sell rated Supervalu's Save-A-Lot stores.

>>5 Stocks Under $10 Set to Soar

The current short interest as a percentage of the float for Supervalu is very high at 15.9%. That means that out of the 211.43 million shares in the tradable float, 32.16 million shares are sold short by the bears. If the bulls get the earnings news they're looking for, then shares of SVU could easily spike sharply higher post-earnings as the bears jump to cover some of their short positions.

From a technical perspective, SVU 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 few weeks, with shares moving higher from its low of $6.11 to its recent high of $7.30 a share. During that uptrend, shares of SVU have been consistently making higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of SVU within range of triggering a big breakout trade post-earnings.

If you're bullish on SVU, 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 $7.30 to $7.59 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 4.13 million shares. If that breakout hits, then SVU will set up to re-test or possibly take out its next major overhead resistance level at its 52-week-high at $8.76 a share to $10 a share.

I would avoid SVU 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 200-day moving average at $6.83 a share to its 50-day moving average of $6.75 a share with high volume. If we get that move, then SVU will set up to re-test or possibly take out its next major support levels at $6.11 to $6.07 a share. Any high-volume move below those levels will then give SVU a chance to tag its next major support levels at $5.76 to $5 a share.

Global Payments

Another earnings short-squeeze prospect is imported beer and wine marketer in the U.S. Global Payments (GPN), which is set to release numbers on Wednesday before the market open. Wall Street analysts, on average, expect Global Payments to report revenue of $624.98 million on earnings of $1.03 per share.

>>3 Stocks Spiking on Unusual Volume

Just recently, RW Baird raised its price target on Global Payments to $72 from $65 citing its long-term earnings potential. The firm also believes there will be a margin expansion helped by improving trends and views the risk/reward as attractive. Also recently, Sterne Agee said Global Payments should report a relatively strong second-quarter results.

The current short interest as a percentage of the float for Global Payments stands at 4.6%. That means that out of the 71.90 million shares in the tradable float, 3.91 million shares are sold short by the bears. This is far from a huge short interest, but it's more than enough to spark a solid short-covering rally if Global Payments can deliver the earnings news the bulls are looking for.

From a technical perspective, GPN 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 $44.93 to its recent high of $67.22 a share. During that uptrend, shares of GPN have been consistently making higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of GPN within range of triggering a big breakout trade post-earnings.

If you're bullish on GPN, 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 $67.22 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 703,984 shares. If that breakout hits, then GPN will set up to enter new 52-week-high territory, which is bullish technical price action. Some possible upside targets off that breakout are $75 to $80 a share.

I would simply avoid GPN or look for short-biased trades if after earnings it fails to trigger that breakout, and then drops back below both its 50-day moving average at $62.61 a share to more near-term support at $61.22 a share with high volume. If we get that move, then GPN will set up to re-test or possibly take out its next major support levels at $56 to $54 a share, or even its 200-day moving average of $52.09 a share.

Bed Bath & Beyond

My final earnings short-squeeze play is retail store chain operator Bed Bath & Beyond (BBBY), which is set to release numbers on Wednesday after the market close. Wall Street analysts, on average, expect Bed Bath & Beyond to report revenue of $2.89 billion on earnings of $1.15 per share.

The current short interest as a percentage of the float for Bed Bath & Beyond sits at 4.1%. That means that out of the 204.53 million shares in the tradable float, 8.56 million shares are sold short by the bears. If the bulls can get the earnings news they're looking for, then shares of BBBY could easily explode higher post-earnings as the shorts rush to cover some of their positions.

From a technical perspective, BBBY is currently trending above both its 50-day and 200-day moving averages, which is bullish. This stock has been uptrending over the last four months, with shares moving higher from its low of $71.47 to its recent high of $80.82 a share. During that uptrend, shares of BBBY have been making mostly higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of BBBY within range of triggering a near-term breakout trade post-earnings.

If you're in the bull camp on BBBY, 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 $80 to its 52-week-high at $80.82 a share with high volume. Look for volume on that move that hits near or above its three-month average volume of 1.30 million shares. If that breakout hits, then BBBY will set up to enter new 52-week-high territory, which is bullish technical price action. Some possible upside targets off that breakout are $90 to $95 a share.

I would avoid BBBY 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 $77.72 a share with high volume. If we get that move, then BBBY will set up to re-test or possibly take out its next major support levels at $75 to its 200-day moving average of $73.41 a share, or even more key support areas around $72 to $71 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.


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.