Stock Quotes in this Article: AIR, DRI, GES, SCHL, BURL

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.

Burlington Stores

My first earnings short-squeeze play is off-price branded apparel retailer Burlington Stores (BURL), which is set to release numbers on Thursday before the market open. Wall Street analysts, on average, expect Burlington Stores to report revenue of $1.34 billion on earnings of $1.03 per share.

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The current short interest as a percentage of the float for Burlington Stores is pretty high at 13.2%. That means that out of the 17.04 million shares in the tradable float, 2.24 million shares are sold short by the bears. This is a decent short interest on a stock with a relatively low float. Any bullish earnings news could easily spark a large short-squeeze for shares for BURL post-earnings.

From a technical perspective, BURL is currently trending below its 50-day moving average, which is bearish. This stock has been trending sideways for the last month and change, with shares moving between $23.88 on the downside and $28.20 on the upside. Any high-volume move above the upper-end of that range post-earnings could trigger a big breakout trade for shares of BURL.

If you're bullish on BURL, 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 $26.94 to $28.20 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 359,205 shares. If that breakout triggers after earnings, then BURL will set up to re-test or possibly take out its next major overhead resistance level at its all-time high of $32.98 a share. Any high-volume move above that level will then give BURL a chance to tag $35 to $40 a share.

I would simply avoid BURL 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 $25.45 to $24.87 a share and then below more support at $23.88 a share with high volume. If we get that move, then BURL will set up to re-test or possibly take out its 52-week low at $21.54 a share.

AAR

Another potential earnings short-squeeze idea is aviation services and technology products player AAR (AIR), which is set to release its numbers on Thursday after the market close. Wall Street analysts, on average, expect AAR to report revenue $525.63 million on earnings of 47 cents per share.

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The current short interest as a percentage of the float for AAR is notable at 8.5%. That means that out of the 36.50 million shares in the tradable float, 3.10 million shares are sold short by the bears. If the bulls get the earnings news they're looking for, then shares of AIR could easily explode higher post-earnings as the bears rush to cover some of their trades.

From a technical perspective, AIR 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 $25.38 to its recent high of $31.13 a share. During that uptrend, shares of AIR have been consistently making higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of AIR within range of triggering a big breakout trade post-earnings.

If you're in the bull camp on AIR, then I would wait until after its report and look for long-biased trades if this stock manages to take out some near-term overhead resistance levels at $31.13 a share to its 52-week high at $31.55 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 377,882 shares. If that breakout kicks off after earnings, then AIR will set up to enter new 52-week-high territory, which is bullish technical price action. Some possible upside targets off that breakout are $40 to $45 a share.

I would simply avoid AIR 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 $30 to $29.50 a share with high volume. If we get that move, then AIR will set up to re-test or possibly take out its next major support levels at its 50-day moving average of $27.94 a share to its 200-day moving average of $26.81 a share.

Scholastic

Another potential earnings short-squeeze candidate is Scholastic (SCHL), a children's publishing, education and media company, which is set to release numbers on Thursday before the market open. Wall Street analysts, on average, expect Scholastic to report revenue of $380 million on a loss of 37 cents per share.

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The current short interest as a percentage of the float for Scholastic is very high at 14.1%. That means that out of the 26.76 million shares in the tradable float, 3.64 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 2.2%, or by about 78,000 shares. If the bears get caught pressing their bets into a strong quarter, then shares of SCHL could easily rip sharply higher post-earnings as the bears rush to cover some of their positions.

From a technical perspective, SCHL 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 and change, with shares moving higher from its low of $27.57 to its recent high of $36.74 a share. During that uptrend, shares of SCHL have been making mostly higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of SCHL within range of triggering a big breakout trade post-earnings.

If you're bullish on SCHL, 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 $36 a share to its 52-week high at $36.74 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 273,180 shares. If that breakout hits, then SCHL will set up to enter new 52-week-high territory, which is bullish technical price action. Some possible upside targets off that breakout are $45 to $50 a share.

I would avoid SCHL 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 $34.45 a share to its 50-day moving average of 34.08 a share with high volume. If we get that move, then SCHL will set up to re-test or possibly take out its next major support levels at its 200-day moving average of $30.72 a share to $28 a share.

Darden Restaurants

Another earnings short-squeeze prospect is full service restaurant player Darden Restaurants (DRI), which is set to release numbers on Friday before the market open. Wall Street analysts, on average, expect Darden Restaurants to report revenue of $2.26 billion on earnings of 82 cents per share.

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The current short interest as a percentage of the float for Darden Restaurants is pretty high at 9.8%. That means that out of the 122.87 million shares in the tradable float, 12.09 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 3.5%, or by about 410,000 shares. If the bears get caught pressing their bets into a bullish quarter, then shares of DRI could easily trend sharply higher post-earnings as the bears jump to cover some of their trades.

From a technical perspective, DRI 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 making lower highs and higher lows over the last two months and change. That chart pattern is now setting up DRI for a breakout trade above a key downtrend line post-earnings if this company can deliver strong results that the bulls like.

If you're bullish on DRI, 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 $50.67 to $51.25 a share with high volume. Look for volume on that move that hits near or above its three-month average action 1.79 million shares. If that breakout materializes after earnings, then DRI will set up to re-test or possibly take out its 52-week high at $55.25 a share. Any high-volume move above that level will then give DRI a chance to tag $60 a share.

I would simply avoid DRI 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 $49 to $47.90 a share and then below more support at $47.04 a share with high volume. If we get that move, then DRI will set up to re-test or possibly take out its next major support levels at $45 to $43.78 a share, or even $42 to $41 a share.

Guess

My final earnings short-squeeze play is apparel and accessories player Guess (GES), which is set to release numbers on Wednesday after the market close. Wall Street analysts, on average, expect Guess to report revenue of $764.99 million on earnings of 80 cents per share.

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The current short interest as a percentage of the float for Guess is pretty high at 10.2%. That means that out of the 64.68 million shares in the tradable float, 6.20 million shares are sold short by the bears. If Guess can deliver the earnings news the bulls are looking for, then this stock can easily spike sharply higher post-earnings as the bears rush to cover some of their bets.

From a technical perspective, GES is currently trending below both its 50-day and 200-day moving averages, which is bearish. This stock has been downtrending over the last few weeks, with shares sliding lower from its high of $31.25 to its intraday low of $28.07 a share. During that move, shares of GES have been consistently making lower highs and lower lows, which is bearish technical price action. That said, shares of GES are starting to rebound higher off its intraday low a share and this stock is starting to trend within range of triggering a near-term breakout trade.

If you're in the bull camp on GES, 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 50-day moving average of $29.18 a share to its 200-day moving average of $30.66 a share and then once it clears more key resistance at $31.71 a share with high volume. Look for volume on that move that hits near or above its three-month average volume of 819,502 shares. If that breakout triggers after earnings, then GES will set up to re-test or possibly take out its 52-week high at $34.94 a share to some more past resistance around $40 a share.

I would avoid GES 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 $26.76 a share with high volume. If we get that move, then GES will set up to re-test or possibly take out its next major support levels at $24 to $20.70 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.