Stock Quotes in this Article: GMCR, RLD, SFLY, P, YELP

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.

Pandora Media

My first earnings short-squeeze play is Internet radio player Pandora Media (P), which is set to release numbers on Wednesday after the market close. Wall Street analysts, on average, expect Pandora Media to report revenue of $649.04 million on earnings of 8 cents per share.

Just today, Canaccord reiterated its buy rating on Pandora and raised its price target to $43 from $35. It expects a solid fourth-quarter report from Pandora Media. Yesterday, Needham raised its price target for Pandora Media to $41 from $33, saying it believes the company's core national advertising business is healthy.

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The current short interest as a percentage of the float for Pandora Media is pretty high at 10.9%. That means that out of the 154.14 million shares in the tradable float, 19.84 million shares are sold short by the bears. If the bulls get the earnings news they're looking for, then shares of Pandora Media could easily explode sharply higher post-earnings as the bears rush to cover some of their bets.

From a technical perspective, P 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 five months, with shares moving higher from its low of $18.02 to its recent high of $37.95 a share. During that uptrend, shares of P have been consistently making higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of P within range of triggering a big breakout trade post-earnings.

If you're bullish on P, then I would wait until after its report and look for long-biased trades if this stock manages to break out above its all-time high of $37.95 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 8.87 million shares. If that breakout hits, then P will set up to enter new all-time-high territory, which is bullish technical price action. Some possible upside targets off that breakout are $50 to $55 a share.

I would simply avoid P 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 $32.36 to its 50-day moving average at $30.61 a share with high volume. If we get that move, then P will set up to re-test or possibly take out its next major support levels at $26 to $25 a share.

Green Mountain Coffee Roasters

Another potential earnings short-squeeze trade idea is specialty coffee and coffee maker Green Mountain Coffee Roasters (GMCR), which is set to release its numbers on Wednesday after the market close. Wall Street analysts, on average, expect Green Mountain Coffee Roasters to report revenue $1.40 billion on earnings of 90 cents per share.

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Just recently, Longbow analyst Philip Terpolilli said demand for products made or licensed by Green Mountain Coffee Roasters has increased versus levels from a year ago. Terpolilli said he's upbeat about the company's outlook over the next year, and he kept a buy rating on the stock.

The current short interest as a percentage of the float for Green Mountain Coffee Roasters is extremely high at 31.3%. That means that out of the 128.07 million shares in the tradable float, 37.55 million shares are sold short by the bears. This stock sports a monster short interest, so if the bulls get the earnings news they're looking for, then we could easily see a large short-squeeze develop post-earnings.

From a technical perspective, GMCR 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 three months, with shares moving higher from its low of $56.69 to its recent high of $81.90 a share. During that move, shares of GMCR have been consistently making higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of GMCR within range of triggering a major breakout trade post-earnings.

If you're in the bull camp on GMCR, 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 $81.80 to $81.90 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 3.29 million shares. If that breakout hits, then GMCR will set up to re-test or possibly take out its next major overhead resistance levels at $87.12 to its 52-week high at $89.66 a share. Any high-volume move above those levels will then give GMCR a chance to tag $100 to $105 a share.

I would simply avoid GMCR or look for short-biased trades if after earnings it fails to trigger that breakout and then drops back below both its 50-day at $75.05 and its 200-day at $73.34 a share with high volume. If we get that move, then GMCR will set up to re-test or possibly take out its next major support levels at $67.50 to $65 a share, or even $62.50 a share.

Yelp

Another potential earnings short-squeeze candidate is online urban city guide player Yelp (YELP), which is set to release numbers on Wednesday after the market close. Wall Street analysts, on average, expect Yelp to report revenue of $67.26 million on a loss of 3 cents per share.

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The current short interest as a percentage of the float for Yelp is very high at 13%. That means that out of the 53.21 million shares in the tradable float, 7.27 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 17.6%, or by about 1.08 million shares. If the bears get caught pressing their bets into a bullish quarter, then shares of YELP could easily explode higher post-earnings as the shorts rush to cover some of their bets.

From a technical perspective, YELP 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 two months, with shares moving higher from its low of $56.65 to its recent high of $83.96 a share. During that uptrend, shares of YELP have been making mostly higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of YELP within range of triggering a big breakout trade post-earnings.

If you're bullish on YELP, 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 $77.83 to its all-time high at $83.96 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 2.94 million shares. If that breakout hits, then YELP will set up to enter new all-time-high territory, which is bullish technical price action. Some possible upside targets off that breakout are $95 to $100 a share.

I would avoid YELP 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 $72.50 to $69.80 a share with high volume. If we get that move, then YELP will set up to re-test or possibly take out its next major support levels at $63.63 to $63.03 a share.

Shutterfly

Another earnings short-squeeze prospect is digital personalized photo products and services provider Shutterfly (SFLY), which is set to release numbers on Wednesday after the market close. Wall Street analysts, on average, expect Shutterfly to report revenue of $406.26 million on earnings of $1.07 per share.

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The current short interest as a percentage of the float for Shutterfly is extremely high at 17.5%. That means that out of the 37.25 million shares in the tradable float, 6.53 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 9.8%, or by about 581,000 shares. If the bears get caught pressing their bets into a strong quarter, then shares of SFLY could easily rip sharply higher post-earnings as the shorts jump to cover some of their trades.

From a technical perspective, SFLY is currently trending above its 50-day moving average and just below its 200-day moving average, which is neutral trendwise. This stock has been trending sideways and consolidating for the last three months, with shares moving between $43 on the downside and $52.49 on the upside. Any high-volume move above the upper-end of its recent sideways trading chart pattern post-earnings could trigger a big breakout trade for shares of SFLY.

If you're bullish on SFLY, 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 $51.17 a share to some more key overhead resistance levels at $51.98 to $52.49 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 722,066 shares. If that breakout hits, then SFLY will set up to re-test or possibly take out its next major overhead resistance levels at $58.83 to its 52-week high at $59.93 a share. Any high-volume move above those levels will then give SFLY a chance to tag $65 a share.

I would simply avoid SFLY 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 $47.55 a share with high volume. If we get that move, then SFLY will set up to re-test or possibly take out its next major support levels at $44.73 to $43 a share. Any high-volume move below those levels will then put $40 to $37.50 into range for shares of SFLY.

RealD

My final earnings short-squeeze play is 3D technologies licensor RealD (RLD), which is set to release numbers on Wednesday after the market close. Wall Street analysts, on average, expect RealD to report revenue of $48.61 million on a loss of 9 cents per share.

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The current short interest as a percentage of the float for RealD is very high at 11.9%. That means that out of the 43.85 million shares in the tradable float, 5.03 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 sharp short-covering rally for shares of RLD post-earnings.

From a technical perspective, RLD is currently trending above its 50-day moving average and below its 200-day moving average, which is neutral trendwise. This stock has been uptrending a bit for the last few weeks, with shares moving higher from its low of $7.65 to its recent high of $9.17 a share. During that move, shares of RLD have been consistently making higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of RLD within range of triggering a major breakout trade post-earnings.

If you're in the bull camp on RLD, 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 $9.17 to $9.44 a share with high volume. Look for volume on that move that hits near or above its three-month average volume of 424,845 shares. If that breakout hits, then RLD will set up to re-test or possibly take out its next major overhead resistance levels at its 200-day moving average of $10.24 to $12 a share, or even $13 to $14 a share.

I would avoid RLD 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 $8.58 to its 50-day moving average of $8.54 a share with high volume. If we get that move, then RLD will set up to re-test or possibly take out its next major support levels at those double bottom prices of $56.10 to $55.59 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.