Stock Quotes in this Article: BXS, CREE, FIO, UMPQ, URI

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.

United Rentals

My first earnings short-squeeze trade idea is industrial equipment and rental player United Rentals (URI), which is set to release numbers on Tuesday after the market close. Wall Street analysts, on average, expect United Rentals to report revenue of $1.33 billion on earnings of $1.47 per share.

The current short interest as a percentage of the float for United Rental is very high at 12.5%. That means that out of the 92.36 million shares in the tradable float, 11.57 million shares are sold short by the bears. If the bulls get the earnings news they're looking for, then shares of URI could easily spike sharply higher post-earnings as the bears rush to cover some of their bets.

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From a technical perspective, URI 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 $52.39 to its recent high of $82.57 a share. During that uptrend, shares of URI have been consistently making higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of URI within range of triggering a big breakout trade post-earnings.

If you're bullish on URI, 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 $82.57 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 1.33 million shares. If that breakout hits, then URI will set up to enter new 52-week-high territory, which is bullish technical price action. Some possible upside targets off that breakout are $95 to $100 a share.

I would simply avoid URI 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 $77 to $75 a share high volume. If we get that move, then URI will set up to re-test or possibly take out its 50-day moving average of $72.74 a share. Any high-volume move below that level will then give URI a chance to tag $67.50 to $65 a share.

Cree

Another potential earnings short-squeeze play is semiconductor player Cree (CREE), which is set to release its numbers on Tuesday after the market close. Wall Street analysts, on average, expect Cree to report revenue $412.46 million on earnings of 39 cents per share.

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Just recently, Wedbush said it expects Cree to report roughly in-line second quarter results and thinks the company could provide weak third quarter guidance. However, the firm believes the company's margins and revenue can expand over the longer term, as LED chip prices increase. The firm maintains its $77 price target and outperform rating on shares of CREE.

The current short interest as a percentage of the float for Cree stands is pretty high at 9.3%. That means that out of the 116.96 million shares in the tradable float, 10.99 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 on shares of CREE post-earnings if the company can deliver the earnings news the bulls are looking for.

From a technical perspective, CREE is currently trending above both its 50-day and 200-day moving averages, which is bullish. This stock recently gapped down sharply from around $68 to $60.14 a share with above-average volume. Following that gap down, shares of CREE have held support just above its 200-day moving average of $61.72 a share.

If you're in the bull camp on CREE, 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 $64.75 to $67.72 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 2.28 million shares. If that breakout hits, then CREE will set up to re-fill some of its previous gap-down-day zone from last October that started at $75.98 a share.

I would simply avoid CREE or look for short-biased trades if after earnings it fails to trigger that breakout and then drops back below both its 200-day moving average at $61.72 a share to its 50-day moving average of $59.21 a share with high volume. If we get that move, then CREE will set up to re-test or possibly take out its next major support levels at $55 to $52 a share. Any high-volume move below those levels will then put its next major support level at $48 into range for shares of CREE.

Fusion-IO

Another potential earnings short-squeeze candidate is database solutions provider Fusion-IO (FIO) which is set to release numbers on Wednesday after the market close. Wall Street analysts, on average, expect Fusion-IO to report revenue of $89.28 million on a loss of 10 cents per share.

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The current short interest as a percentage of the float for Fusion-IO is very high at 16.8%. That means that out of the 90.93 million shares in the tradable float, around 16.55 million shares are sold short by the bears. This is a very high short interest on a stock with relatively low tradable float. If the bulls get the earnings news they're looking for, then shares of FIO could easily skyrocket higher post-earnings as the bears jump to cover some of their bets.

From a technical perspective, FIO is currently trending below both its 50-day and 200-day moving averages, which is bearish. This stock has been downtrending badly for the last five months, with shares plunging lower from its high of $15.50 to its recent low of $8.32 a share. During that downtrend, shares of FIO have been consistently making lower highs and lower lows, which is bearish technical price action. That said, shares of FIO have recently formed a double bottom chart pattern at $8.40 to $8.32 a share. Following that bottom, shares of FIO have now started to move within range of triggering a major breakout trade post-earnings.

If you're bullish on FIO, 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 $9.33 to $9.82 a share and then once it clears some more key overhead resistance at $9.95 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 3.39 million shares. If that breakout hits, then FIO will set up to re-test or possibly take out its next major overhead resistance levels at $11.17 to $11.31 a share. Any high-volume move above those levels will then give FIO a chance to re-fill some of its gap-down-day zone from last October that started at $13.50 a share.

I would avoid FIO or look for short-biased trades if after earnings it fails to trigger that breakout and then drops back below its 52-week low at $8.32 a share with high volume. If we get that move, then FIO will set up to enter new 52-week-low territory, which is bearish technical price action. Some possible downside targets off that move are $7 to $6 a share.

Umpqua

Another earnings short-squeeze prospect is banking stock Umpqua (UMPQ), which is set to release numbers on Wednesday after the market close. Wall Street analysts, on average, expect Umpqua to report revenue of $137.08 million on earnings of 25 cents per share.

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The current short interest as a percentage of the float for Umpqua is extremely high at 23%. That means that out of the 110.56 million shares in the tradable float, 25.45 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 9.2%, or by about 2.15 million shares. If the bears get caught pressing their bets into a bullish quarter, then shares of UMPQ could easily rip sharply higher post-earnings as the bears rush to cover some of their positions.

From a technical perspective, UMPQ 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 four months and change, with shares moving higher from its low of $15.43 to its recent high of $19.50 a share. During that uptrend, shares of UMPQ have been making mostly higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of UMPQ within range of triggering a big breakout trade post-earnings.

If you're bullish on UMPQ, 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 $19.21 to its 52-week high at $19.65 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 1.17 million shares. If that breakout hits, then UMPQ will set up to enter new 52-week-high territory, which is bullish technical price action. Some possible upside targets off that breakout are $25 to $27 a share.

I would simply avoid UMPQ 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 $18.21 a share to more key near-term support at $18 a share with high volume. If we get that move, then UMPQ will set up to re-test or possibly take out its next major support levels $17 to $16 a share, or even its 200-day moving average at $15.77 a share.

BancorpSouth

My final earnings short-squeeze play is banking player BancorpSouth (BXS), which is set to release numbers on Wednesday after the market close. Wall Street analysts, on average, expect BancorpSouth to report revenue of $165.72 million on earnings of 28 cents per share.

Recently, RBC Capital raised its price target on shares of BancorpSouth to $27 from $23. The firm thinks BancorpSouth will look for additional acquisitions after it agreed to buy Ouachita Bancshares.

The current short interest as a percentage of the float for BancorpSouth stands at 8.1%. That means that out of the 83.47 million shares in the tradable float, 6.73 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 14.8%, or by about 870,000 shares. If the bears get caught pressing their bets into a strong quarter, then shares of BXS could easily spike sharply higher post-earnings as the bears rush to cover some of their positions.

From a technical perspective, BXS 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 18.84 to its recent high of $25.54 a share. During that uptrend, shares of BXS have been consistently making higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of BXS within range of triggering a big breakout trade post-earnings.

If you're in the bull camp on BXS, 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 $25.08 to its 52-week high at $25.54 a share with high volume. Look for volume on that move that hits near or above its three-month average volume of 733,608 shares. If that breakout hits, then BXS will set up to enter new 52-week-high territory, which is bullish technical price action. Some possible upside targets off that breakout are $33 to $35 a share.

I would avoid BXS 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 $24.11 a share to more key near-term support levels at $24.07 to $23 a share with high volume. If we get that move, then BXS will set up to re-test or possibly take out its next major support levels at $22 to $21 a share, or even its 200-day moving average of $20.01 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.