Stock Quotes in this Article: AMAG, FAST, INTC, LLTC, PLXS

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.

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.

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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.

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

Linear Technology

My first earnings short-squeeze trade idea is semiconductor player Linear Technology (LLTC), which is set to release numbers on Tuesday after the market close. Wall Street analysts, on average, expect Linear Technology to report revenue of $334.79 million on earnings of 45 cents per share.

The current short interest as a percentage of the float for Linear Technology is notable at 4.3%. That means that out of the 231.53 million shares in the tradable float, 9.98 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 579,000 shares. If the bears get caught pressing their bets into a strong quarter, then shares of LLTC could easily rip sharply higher post-earnings as the bears rush to cover some of their short positions.

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From a technical perspective, LLTC 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 moving higher from its low of $38.04 to its recent high of $47.55 a share. During that move, shares of LLTC have been consistently making higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of LLTC within range of triggering a near-term breakout trade post-earnings.

If you're bullish on LLTC, 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 $47.55 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 1.98 million shares. If that breakout hits, then LLTC 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 simply avoid LLTC 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 $44.41 a share to its 50-day moving average of $43.21 a share with high volume. If we get that move, then LLTC will set up to re-test or possibly take out its next major support levels at $40 to its 200-day moving average of $39.20 a share.

Fastenal

Another potential earnings short-squeeze play is industrial and construction supplies retailer Fastenal (FAST), which is set to release its numbers on Wednesday before the market open. Wall Street analysts, on average, expect Fastenal to report revenue $814.34 million on earnings of 35 cents per share.

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The current short interest as a percentage of the float for Fastenal is pretty high at 9.1%. That means that out of the 271.87 million shares in the tradable float, 24.66 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 11.5%, or by about 2.53 million shares. If the bears get caught pressing their bets into a bullish quarter, then shares of FAST could soar sharply higher post-earnings as the bears jump to cover some of their short positions.

From a technical perspective, FAST is currently trending above both its 50-day and 200-day moving averages, which is bullish. This stock has been uptrending a bit for the last few weeks, with shares moving higher from its low of $45.43 to its intraday high of $48.37 a share. During that uptrend, shares of FAST have been consistently making higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of FAST within range of triggering a big breakout trade post-earnings.

If you're in the bull camp on FAST, 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 $50 to $52 a share and then above its 52-week high at $53.38 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 1.88 million shares. If that breakout hits, then FAST will set up to enter new 52-week-high territory, which is bullish technical price action. Some possible upside targets off that breakout are $60 to $65 a share.

I would simply avoid FAST 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 $ 47.15 a share with high volume. If we get that move, then FAST will set up to re-test or possibly take out its next major support levels at $45.43 to $43.53 a share. Any high-volume move below those levels will then give FAST a chance to tag $40 a share.

Amag Pharmaceuticals

Another potential earnings short-squeeze candidate is biopharmaceutical player Amag Pharmaceuticals (AMAG) which is set to release numbers on Wednesday before the market open. Wall Street analysts, on average, expect Amag Pharmaceuticals to report revenue of $21.12 million on a loss of 7 cents per share.

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The current short interest as a percentage of the float for Amag Pharmaceuticals stands at 3.1%. That means that out of the 15.97 million shares in the tradable float, around 673,000 shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 9.3%, or by about 57,000 shares. If the bears get caught pressing their bets into a strong quarter, then shares of AMAG could easily jump sharply higher post-earnings as the bears rush to cover some of their bets.

From a technical perspective, AMAG is currently trending below both its 50-day and 200-day moving averages, which is bearish. This stock has been downtrending for the last two months, with shares moving lower from its high of $28.42 to its recent low of $20.03 a share. During that downtrend, shares of AMAG have been making mostly lower highs and lower lows, which is bearish technical price action. That said, shares of AMAG have now started to rebound higher off that $20.03 low and it's quickly moving within range of triggering a near-term breakout trade post-earnings.

If you're bullish on AMAG, 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 its 200-day moving average of $23.05 to its 50-day moving average of $24.13 a share and then once it clears more near-term overhead resistance levels at $24.93 to $25.98 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 166,206 shares. If that breakout hits, then AMAG will set up to re-test or possibly take out its next major overhead resistance levels at its 52-week high of $28.42 to $32 a share.

I would avoid AMAG 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 $20.03 to $18.94 a share with high volume. If we get that move, then AMAG will set up to re-test or possibly take out its next major support level at its 52-week low of $15 a share.

Intel

Another earnings short-squeeze prospect is semiconductor player Intel (INTC), which is set to release numbers on Thursday after the market close. Wall Street analysts, on average, expect Intel to report revenue of $13.72 billion on earnings of 52 cents per share.

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The current short interest as a percentage of the float for Intel stands at 4.3%. That means that out of the 4.96 billion shares in the tradable float, 215.03 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 decent short-covering rally if Intel can deliver the earnings news the bulls are looking for.

From a technical perspective, INTC 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 five months, with shares moving higher from its low of $21.68 to its recent high of $26.04 a share. During that uptrend, shares of INTC have been making mostly higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of INTC within range of triggering a big breakout trade post-earnings.

If you're bullish on INTC, then I would wait until after its report and look for long-biased trades if this stock manages to break out above some key overhead resistance levels at its 52-week high of $26.04 to some past overhead resistance at $27.62 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 30.94 million shares. If that breakout hits, then INTC 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 simply avoid INTC 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 $25.25 a share to its 50-day moving average at $24.70 a share with high volume. If we get that move, then INTC will set up to re-test or possibly take out its next major support levels at $24.15 to its 200-day moving average of $23.40 a share. Any high-volume move below those levels will then give INTC a chance to tag $22 to $21.50 a share.

Plexus

My final earnings short-squeeze play is semiconductors player Plexus (PLXS), which is set to release numbers on Wednesday after the market close. Wall Street analysts, on average, expect Plexus to report revenue of $536.04 million on earnings of 61 cents per share.

Just this morning, Raymond James downgraded shares of Plexus to sell citing lack of catalysts to drive higher earnings estimates. The firm sees downside risk to the mid-to-high $30s.

The current short interest as a percentage of the float for Plexus sits at 2%. That means that out of the 33.39 million shares in the tradable float, 656,000 shares are sold short by the bears. This is by no means a large short interest, but it's more than enough to spark a solid short-covering rally post-earnings of Plexus can deliver the earnings news the bulls are looking for.

From a technical perspective, PLXS 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 just under $31 to its recent high of $44.16 a share. During that uptrend, shares of PLXS have been consistently making higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of PLXS within range of triggering a big breakout trade post-earnings.

If you're in the bull camp on PLXS, then I would wait until after its report and look for long-biased trades if this stock manages to break out above Monday's intraday high of $42.30 a share to its 52-week high at $44.16 a share with high volume. Look for volume on that move that hits near or above its three-month average volume of 170,062 shares. If that breakout hits, then PLXS will set up to enter new 52-week-high territory, which is bullish technical price action. Some possible upside targets off that breakout are $50 to $55, or even $60 a share.

I would avoid PLXS 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 $40.67 a share with high volume. If we get that move, then PLXS will set up to re-test or possibly take out its next major support levels at $39 to $38 a share. Any high-volume move below those levels will then give PLXS a chance to tag $36.50 to its 200-day moving average of $34.17 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.