Stock Quotes in this Article: SGEN, SGMO, Z, ANGI, TRLA

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 Dividend Stocks That Want to Give You a Raise 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.

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 Rocket Stocks to Buy for a Market Bounce

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.

Sangamo Biosciences

My first earnings short-squeeze trade play is clinical-stage biopharmaceutical player Sangamo Biosciences (SGMO), which is set to release numbers on Tuesday after the market close. Wall Street analysts, on average, expect Sangamo Biosciences to report revenue of $5.69 million on a loss of 10 cents per share.

>>5 Biotech Stocks to Trade in February

The current short interest as a percentage of the float for Sangamo Biosciences is very high at 17.6%. That means that out of the 51.33 million shares in the tradable float, 10.46 million shares are sold short by the bears. This is a high short interest on a stock with a relatively low float. Any bullish earnings news could easily spark a large short-squeeze for shares of SGMO post-earnings.

From a technical perspective, SGMO is currently trending above both its 50-day and 200-day moving averages, which is bullish. This stock has been trending sideways and consolidating for the last month, with shares moving between $17.81 on the downside and $20.74 on the upside. Any high-volume move above the upper-end of its recent range post-earnings could trigger a major breakout trade for shares of SGMO.

If you're bullish on SGMO, 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 to its 52-week high at $20.74 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 961,302 shares. If that breakout hits, then SGMO 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 $30 a share.

I would simply avoid SGMO 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 $17.86 to $17.81 a share with high volume. If we get that move, the SGMO will set up to re-test or possibly take out its next major support levels at its 50-day moving average of $15.68 to $13 a share.

Angie's List

Another potential earnings short-squeeze trade idea is consumer-driven Internet services player Angie's List (ANGI), which is set to release its numbers on Wednesday after the market close. Wall Street analysts, on average, expect Angie's List to report revenue $68.50 million on earnings of 14 cents per share.

>>5 Stocks Poised for Breakouts

The current short interest as a percentage of the float for Angie's List is extremely high at 39.6%. That means that out of the 53.60 million shares in the tradable float, 17.11 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 12.8%, or by about 1.93 million shares. If the bears get caught pressing their bets into a bullish quarter, then shares of ANGI could easily explode higher post-earnings as the shorts rush to cover some of their positions.

From a technical perspective, ANGI 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 uptrending over the last two months, with shares moving higher from its low of $11.88 to its recent high of $19.80 a share. During that uptrend, shares of ANGI have been consistently making higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of ANGI within range of triggering a major breakout trade post-earnings.

If you're in the bull camp on ANGI, 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 $19.70 a share to more resistance at $19.80 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 1.26 million shares. If that breakout hits, then ANGI will set up to re-test or possibly take out its next major overhead resistance levels at $25 to $28 a share.

I would simply avoid ANGI or look for short-biased trades if after earnings it fails to trigger that breakout and then drops back below some near-term support levels at $16.04 to $15.43 a share and then below its 50-day at $14.68 a share with high volume. If we get that move, then ANGI will set up to re-test or possibly take out its next major support levels at $13.46 to $12.71 a share. Any high-volume move below those levels will then give ANGI a chance to tag $12 to $11 a share.

Zillow

Another potential earnings short-squeeze candidate is real estate and home-related information provider Zillow (Z), which is set to release numbers on Wednesday after the market close. Wall Street analysts, on average, expect Zillow to report revenue of $56.18 million on earnings of 7 cents per share.

>>3 Huge Stocks to Trade (or Not)

The current short interest as a percentage of the float for Zillow is extremely high at 26.7%. That means that out of the 27.11 million shares in the tradable float, 7.08 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 7.9%, or by about 516,000 shares. If the bears get caught pressing their bets into a strong quarter, then shares of Z could easily soar sharply higher post-earnings as the bears jump to cover some of their trades.

From a technical perspective, Z is currently trending above both its 50-day and 200-day moving averages, which is bullish. This stock recently formed a double bottom chart pattern at $76 to $76.26 a share. That bottomed took place right above its 200-day moving average and the stock has now started to rebound sharply off those levels and back above its 50-day moving average. That move is quickly pushing shares of Z within range of triggering a major breakout trade post-earnings.

If you're bullish on Z, then I would wait until after its report and look for long-biased trades if this stock manages to break out above some key near-term overhead resistance at $93.07 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 1.06 million shares. If that breakout hits, then Z will set up to re-test or possibly take out its 52-week high at $103 a share. Any high-volume move above $103 will then give Z a chance to tag $110 to $115 a share.

I would avoid Z 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 $83 to its 50-day moving average of $81.22 a share with high volume. If we get that move, then Z will set up to re-test or possibly take out its next major support levels at its 200-day moving average of $76 a share to $72.50 a share.

Seattle Genetics

Another earnings short-squeeze prospect is biotechnology player Seattle Genetics (SGEN), which is set to release numbers on Tuesday after the market close. Wall Street analysts, on average, expect Seattle Genetics to report revenue of $59.27 million on a loss of 24 cents per share.

>>3 Biotech Stocks Rising on Big Volume

The current short interest as a percentage of the float for Seattle Genetics is pretty high at 13.1%. That means that out of the 80.86 million shares in the tradable float, 15.74 million shares are sold short by the bears. If the bulls get the earnings news they're looking for, then shares of SGEN could easily spike sharply higher post-earnings as the bears rush to cover some of their bets.

From a technical perspective, SGEN is currently trending above both its 50-day and 200-day moving averages, which is bullish. This stock recently pulled back off its high of $49.45 to right below its 50-day moving average of $42.48 a share. Shares of SGEN have now started to rebound and trade back above its 50-day. That move is starting to push shares of SGEN within range of triggering a big breakout trade post-earnings.

If you're bullish on SGEN, 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 $44.94 to $46.95 a share and then once it takes out 52-week high at $49.45 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 856,303 shares. If that breakout hits, then SGEN 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 SGEN 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 $42.48 and its 200-day at $40.08 a share with high volume. If we get that move, then SGEN will set up to re-test or possibly take out its next major support levels at $38 to $36.79 a share. Any high-volume move below those levels will then give SGEN a chance to tag $32.50 a share.

Trulia

My final earnings short-squeeze play real estate search engine player Trulia (TRLA), which is set to release numbers on Thursday after the market close. Wall Street analysts, on average, expect Trulia to report revenue of $49.39 million on earnings of 7 cents per share.

>>5 Toxic Stocks to Sell Now

The current short interest as a percentage of the float for Trulia is extremely high at 24.1%. That means that out of the 31.29 million shares in the tradable float, 6.38 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 8.8%, or by about 514,000 shares. If the bears get caught pressing their bets into a bullish quarter, then shares of TRLA could rip significantly higher post-earnings as the bears rush to cover some of their positions.

From a technical perspective, TRLA is currently trending just above its 50-day moving average and below its 200-day moving average, which is neutral trendwise. This stock has been downtrending a bit over the last month, with shares moving lower from its high of $39.34 to its recent low of $31.26 a share. During that move, shares of TRLA have been making mostly lower highs and lower lows, which is bearish technical price action. That said, shares of TRLA have started to bounce off its recent low of $31.26 and the stock is starting to challenge its 50-day moving average at $34.18 a share. That move is starting to push shares of TRLA within range of triggering a big breakout trade post-earnings.

If you're in the bull camp on TRLA, then I would wait until after its report and look for long-biased trades if this stock manages to break out above some key near-term overhead resistance levels at $34.64 to its 200-day moving average of $37.32 a share and then once it takes out more resistance levels at $39.34 to $40.95 a share with high volume. Look for volume on that move that hits near or above its three-month average volume of 1.43 million shares. If that breakout hits, then TRLA will set up to re-test or possibly take out its next major overhead resistance levels at $46 to its all-time high at $52.71 a share. Any high-volume move above $52.71 will then give TRLA a chance to make a run at $60 a share.

I would avoid TRLA 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 $31.26 to $30 a share with high volume. If we get that move, then TRLA will set up to re-test or possibly take out its next major support levels at $26.35 to its 52-week low at $23.08 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.