Stock Quotes in this Article: APOL, AYI, LWAY, ROSG, TXI

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.

Apollo Education Group

My first earnings short-squeeze idea is private education provider Apollo Education Group (APOL), which is set to release numbers on Tuesday after the market close. Wall Street analysts, on average, expect Apollo Education Group to report revenue of $689.04 million on earnings of 19 cents per share.

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The current short interest as a percentage of the float for Apollo Education Group is very high at 13.86%. That means that out of the 99.68 million shares in the tradable float, 13.81 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 8.3%, or by about 1.06 million shares. If the bears get caught pressing their bets into a strong quarter, then shares of APOL could easily spike sharply higher post-earnings as the bears rush to cover some of their bets.

From a technical perspective, APOL is currently trending above both its 50-day and 200-day moving averages, which is bullish. This stock has been trending sideways for the last three months, with shares moving between $30.10 on the downside and $35.92 on the upside. Shares of APOL are now starting to spike higher off its 50-day moving average and it's quickly moving within range of triggering a big breakout trade above the upper-end of its recent sideways trading chart pattern.

If you're bullish on APOL, 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 $33.90 to $35.25 a share and then once it takes out its 52-week high at $35.92 a share with high volume. Look for volume on that move that hits near or above its three-month average volume of 2.23 million shares. If that breakout hits, then APOL 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 APOL 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 $32 to $30.10 a share high volume. If we get that move, then APOL will set up to re-fill some of its previous gap-up-day zone from January that started near $27 a share. If that gap gets filled with volume, then APOL could easily re-test its 200-day moving average of $25.09 a share.

Lifeway Foods

Another potential earnings short-squeeze play is health food products player Lifeway Foods (LWAY), which is set to release its numbers on Monday after the market close. Wall Street analysts, on average, expect Lifeway Foods to report revenue $23.42 million on earnings of 8 cents per share.

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The current short interest as a percentage of the float for Lifeway Foods is pretty high at 13%. That means that out of the 4.61 million shares in the tradable float, 607,000 shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 1.4%, or by about 8,500 shares. If the bears get caught pressing their bets into a bullish quarter, then shares of LWAY could easily explode sharply higher post-earnings as the shorts rush to cover some of their trades.

From a technical perspective, LWAY is currently trending above its 50-day moving average and below its 200-day moving average, which is neutral trendwise. This stock has been trending sideways for the last three months, with shares moving between $13.35 on the downside and $15.60 on the upside. Shares of LWAY are spiking sharply higher here back above its 50-day moving average and it's starting to move within range of triggering a big breakout trade above the upper-end of its recent sideways trading chart pattern.

If you're in the bull camp on LWAY, 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 $15.20 to $15.60 a share and then once it takes out more resistance at $16 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 18,376 shares. If that breakout triggers, then LWAY will set up to re-test or possibly take out its next major overhead resistance levels at $17.20 to its 52-week high at $19.99 a share.

I would simply avoid LWAY 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 $14.18 a share to more near-term support levels at $13.52 to $13.35 a share with high volume. If we get that move, then LWAY will set up to re-test or possibly take out its next major support levels at $12.50 to its 52-week low at $10.65 a share.

Rosetta Genomics

Another potential earnings short-squeeze candidate is biotechnology stock Roseetta Genomics (ROSG), which is set to release numbers on Monday after the market close. Wall Street analysts, on average, expect Rosetta Genomics to report revenue of $250,000 on a loss of 50 cents per share.

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The current short interest as a percentage of the float for Rosetta Genomics is pretty high at 10.3%. That means that out of the 9.82 million shares in the tradable float, 1.01 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 9.9%, or by about 90,000 shares. If the bears get caught pressing their bets into a strong quarter, then shares of ROSG could easily spike sharply higher post-earnings as the shorts jump to cover some of their positions.

From a technical perspective, ROSG is currently trending above both its 50-day and 200-day moving averages, which is bullish. This stock has been downtrending over the last few weeks, with shares dropping from its high of $6.69 to its recent low of $4.62 a share. During that move, shares of ROSG have been consistently making lower highs and lower lows, which is bearish technical price action. That said, shares of ROSG have for now stopped its downtrend right around its 50-day moving average of $4.53 a share.

If you're bullish on ROSG, 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 $5 to $5.50 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 612,082 shares. If that breakout materializes after earnings, then ROSG will set up to re-test or possibly take out its next major overhead resistance levels at $6 to its 52-week high at $6.69 a share.

I would avoid ROSG 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 $4.53 a share with high volume. If we get that move, then ROSG will set up to re-test or possibly take out its next major support levels at $4 to $3.85 a share, or even its 200-day moving average of $3.52 a share.

Texas Industries

Another earnings short-squeeze prospect is construction materials supplier Texas Industries (TXI), which is set to release numbers on Wednesday after the market close. Wall Street analysts, on average, expect Texas Industries to report revenue of $187.46 million on a loss of 55 cents per share.

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The current short interest as a percentage of the float for Texas Industries is very high at 16.5%. That means that out of the 13.41 million shares in the tradable float, 2.22 million shares are sold short by the bears. This is a large short interest on a stock with a low tradable float. If the bulls get the earnings news they're looking for, then shares of TXI could easily spike sharply higher post-earnings as the bears rush to cover some of their trades.

From a technical perspective, TXI 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, with shares soaring higher from its low of $56.04 to its recent high of $89.94 a share. During that uptrend, shares of TXI have been consistently making higher lows and higher highs, which is bullish technical price action.

If you're bullish on TXI, then I would wait until after its report and look for long-biased trades if this stock manages to break out into new 52-week-high territory above $89.94 a share or above Wednesday's intraday high if greater with strong volume. Look for volume on that move that hits near or above its three-month average action of 398,260 shares. If that breakout hits, then TXI will set up to enter new 52-week-high territory, which is bullish technical price action. Some possible upside targets off that breakout are $105 to $110 a share, or even $120 a share.

I would simply avoid TXI 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 $85 a share with high volume. If we get that move, then TXI will set up to re-test or possibly take out its next major support levels at its 50-day moving average of $81.07 a share to $77.50 a share, or even $72 a share.

Acuity Brands

My final earnings short-squeeze play lighting solutions provider Acuity Brands (AYI), which is set to release numbers on Wednesday before the market open. Wall Street analysts, on average, expect Acuity Brands to report revenue of $553.95 million on earnings of 84 cents per share.

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The current short interest as a percentage of the float for Acuity Brands is notable at 3.5%. That means that out of the 42.17 million shares in the tradable float, 1.51 million shares are sold short by the bears. This is not a huge short interest, but it's more than enough to spark a decent short-covering rally post-earnings if the bears get squeezed out of some of their positions.

From a technical perspective, AYI 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 lower over the last month, with shares moving down from its high of $146.28 to its recent low of $127.22 a share. During that move, shares of AYI have been making mostly lower highs and lower lows, which is bearish technical price action. That said, shares of AYI have started to bounce off that recent low of $127.22 and it's starting to move within range of triggering a near-term breakout trade.

If you're in the bull camp on AYI, 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 $134.72 a share with high volume. Look for volume on that move that hits near or above its three-month average volume of 442,915 shares. If that breakout hits, then AYI will set up to re-test or possibly take out its next major overhead resistance levels at $140 to its 52-week high at $146.28 a share.

I would avoid AYI 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 $127.22 to $120 a share with high volume. If we get that move, then AYI will set up to re-fill some of its previous gap-up-day zone from January that started right below $110 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.