Stock Quotes in this Article: CRUS, LXK, RCII, WRLD, EA

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 Rocket Stocks for a Volatile Week

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.

>>5 Stocks Ready to Break Out

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.

Rent-A-Center

My first earnings short-squeeze play is durable goods rent-to-own operator Rent-A-Center (RCII), which is set to release numbers on Monday after the market close. Wall Street analysts, on average, expect Rent-A-Center to report revenue of $787.95 million on earnings of 75 cents per share.

The current short interest as a percentage of the float for Rent-A-Center is very high at 16.1%. That means that out of the 51.73 million shares in the tradable float, 8.34 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 7.2%, or by about 562,000 shares. If the bears get caught pressing their bets into a bullish quarter, then shares of RCII could easily rip significantly higher post-earnings as the shorts rush to cover some of their positions.

>>4 Stocks Spiking on Big Volume

From a technical perspective, RCII is currently trending below both its 50-day and 200-day moving averages, which is bearish. This stock has been downtrending over the last six months, with shares dropping sharply from over $39 to its recent low of $30.74 a share. During that downtrend, shares of RCII have been consistently making lower highs and lower lows, which is bearish technical price action.

If you're bullish on RCII, 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 $32.01 to its 50-day moving average of $33.08 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 524,976 shares. If that breakout hits, then RCII will set up to re-test or possibly take out its next major overhead resistance levels at its 200-day moving average of $35.70 to $37.23 a share. Any high-volume move above those levels will then give RCII a chance to tag $40

I would simply avoid RCII or look for short-biased trades if after earnings it fails to trigger that breakout and then drops back below its 52-week low of $30.74 a share to some more past support at $30.30 a share with high volume. If we get that move, then RCII will set up to enter new 52-week-low territory, which is bearish technical price action. Some possible downside targets off that move are $25 to $22 a share.

World Acceptance

Another potential earnings short-squeeze trade idea is small-loan consumer finance player World Acceptance (WRLD), which is set to release its numbers on Tuesday before the market open. Wall Street analysts, on average, expect World Acceptance to report revenue $153.47 million on earnings of $2 per share.

>>4 Big Stocks on Traders' Radars

The current short interest as a percentage of the float for World Acceptance is extremely high at 39%. That means that out of the 8.45 million shares in the tradable float, 4.04 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 7%, or by about 264,000 shares. If the bears get caught pressing their bets into a strong quarter, then shares of WRLD could skyrocket sharply higher post-earnings as the shorts rush to cover some of their bets.

From a technical perspective, WRLD is currently trending below both its 50-day and 200-day moving averages, which is bearish. This stock has been trending sideways for the last three months, with shares moving between $84.22 on the downside and $93.71 on the upside. Any high-volume move above the upper-end of its recent range post-earnings could easily trigger a major breakout trade for shares of WRLD.

If you're in the bull camp on WRLD, then I would wait until after its report and look for long-biased trades if this stock manages to break out above its 200-day moving average of $89.33 a share to some more key overhead resistance levels at $91.35 to $93.71 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 158,056 shares. If that breakout hits, then WRLD will set up to re-fill some of its previous gap-down-day zone from last November that started at $105 a share.

I would simply avoid WRLD 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 $85.23 to $84.22 a share with high volume. If we get that move, then WRLD will set up to re-test or possibly take out its next major support levels at $82.10 to $79.25 a share. Any high-volume move below those levels will then put its next major support level at $75.12 a share into range for shares of WRLD.

Cirrus Logic

Another potential earnings short-squeeze candidate is specialized semiconductor player Cirrus Logic (CRUS) which is set to release numbers on Tuesday after the market close. Wall Street analysts, on average, expect Cirrus Logic to report revenue of $210 million on earnings of 74 cents per share.

>>5 Stocks Under $10 Set to Soar

The current short interest as a percentage of the float for Cirrus Logic is extremely high at 22.5%. That means that out of the 63.50 million shares in the tradable float, 14.25 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 2.8%, or by about 391,000 shares. If the bears get caught pressing their bets into a bullish quarter, then shares of CRUS could easily explode higher post-earnings as the shorts jump to cover some of their trades.

From a technical perspective, CRUS is currently trending below both its 50-day and 200-day moving averages, which is bearish. This stock has been trending sideways and consolidating for the last three months, with shares moving between $18.55 on the downside and $21.12 on the upside. Any high-volume move above the upper end of its recent range post-earnings could easily trigger a major breakout trade for shares of CRUS.

If you're bullish on CRUS, 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 $20.70 to $21.12 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 2.57 million shares. If that breakout hits, then CRUS will set up to re-test or possibly take out its next major overhead resistance levels at $23.15 to $25 a share. Any high-volume move above those levels will then give CRUS a chance to tag its 52-week high at $30 a share.

I would avoid CRUS 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 $18.98 to $18.55 a share with high volume. If we get that move, then CRUS will set up to re-test or possibly take out its next major support levels at $17.36 to its 52-week low at $16.46 a share. Any high-volume move below those levels will then put $15 to $14 into range for shares of CRUS.

Electronic Arts

Another earnings short-squeeze prospect is video game maker Electronic Arts (EA), which is set to release numbers on Tuesday after the market close. Wall Street analysts, on average, expect Electronic Arts to report revenue of $1.66 billion on earnings of $1.24 per share.

>>3 Huge Stocks to Trade (or Not)

Just recently, Credit Suisse upgraded shares of Electronic Arts to outperform from neutral, citing positive changes from expected portfolio rationalization, better visibility on long-term product roadmap, and more attractive valuation given the recent pullback.

The current short interest as a percentage of the float for Electronic Arts is pretty high at 11.1%. That means that out of the 306.61 million shares in the tradable float, 32.68 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 13%, or by about 3.75 million shares. If the bears get caught pressing their bets into a strong quarter, then shares of EA could easily experience a monster short-squeeze post-earnings as the bears rush to cover some of their positions.

From a technical perspective, EA 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 few weeks, with shares moving higher from its low of $21.25 to its recent high of $24.59 a share. During that uptrend, shares of EA have been making mostly higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of EA within range of triggering a big breakout trade post-earnings.

If you're bullish on EA, 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 at $24.59 a share (or Tuesday's intraday high if greater) with high volume. Look for volume on that move that hits near or above its three-month average action of 5.65 million shares. If that breakout hits, then EA will set up to re-test or possibly take out its next major overhead resistance levels at $26.63 to its 52-week high at $28.13 a share. Any high-volume move above those levels will then give EA a chance to trend north of $30 a share.

I would simply avoid EA 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 $22.97 a share with high volume. If we get that move, then EA will set up to re-test or possibly take out its next major support levels $21.25 to $20.47 a share. Any high-volume move below those levels will then give EA a chance to re-test or possibly take out its next major support levels at $18 to $17 a share.

Lexmark International

My final earnings short-squeeze play is computer hardware player Lexmark International (LXK), which is set to release numbers on Tuesday before the market open. Wall Street analysts, on average, expect Lexmark International to report revenue of $929.45 million on earnings of $1.10 per share.

>>5 Big Trades to Survive the S&P's Cold Spell

The current short interest as a percentage of the float for Lexmark International is very high at 18.7%. That means that out of the 61.25 million shares in the tradable float, 11.51 million shares are sold short by the bears. This is a high short interest on a stock with a relatively low tradable float. If the bulls get the earnings news they're looking for, then shares of LXK could easily rip sharply higher post-earnings as the bears jump to cover some of their bets.

From a technical perspective, LXK 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 trending sideways and consolidating for the last three months, with shares moving between $32.57 on the downside and $37.09 on the upside. Any high-volume move above the upper-end of its recent range post-earnings could trigger a big breakout trade for shares of LXK.

If you're in the bull camp on LXK, 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 $35.32 a share to some more key overhead resistance levels at $36.61 to $37.09 a share with high volume. Look for volume on that move that hits near or above its three-month average volume of 779,518 shares. If that breakout hits, then LXK will set up to re-test or possibly take out its next major overhead resistance levels at $39.35 to its 52-week high at $41.45 a share. Any high-volume move above those levels will then give LXK a chance to tag $45 a share.

I would avoid LXK or look for short-biased trades if after earnings it fails to trigger that breakout, and then drops back below its 200-day moving average of $33.44 a share to more key near-term support levels at $32.57 to $32.43 a share with high volume. If we get that move, then LXK will set up to re-test or possibly take out its next major support levels at $28.97 to $24 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.