Stock Quotes in this Article: ACTG, LLTC, SCSS, SNDK, HLSS

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.

Acacia Research

My first earnings short-squeeze play is patented technologies player Acacia Research (ACTG), which is set to release numbers on Thursday after the market close. Wall Street analysts, on average, expect Acacia Research to report revenue $16.92 million on earnings of 4 cents per share.

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The current short interest as a percentage of the float for Acacia Research is extremely high at 20.3%. That means that out of the 49.75 million shares in the tradable float, 10.01 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 5.5%, or by about 520,000 shares. If the bears get caught pressing their bets into a bullish quarter, then shares of ACTG could easily rip sharply higher post-earnings as the bears jump to cover some of their trades.

From a technical perspective, ACTG 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 strong for the last four months, with shares moving higher from its low of $12.13 to its recent high of $18.29 a share. During that uptrend, shares of ACTG have been making mostly higher lows and higher highs, which is bullish technical price action. Shares of ACTG are now pulling back to its 50-day moving average, and if that level holds, the stock could be setting up to run higher post-earnings.

If you're bullish on ACTG, 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 at $17.51 and then once it takes out more near-term overhead resistance at $18.29 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 673,777 shares. If that breakout triggers post-earnings, then ACTG will set up to re-fill its previous gap-down-day zone from last October that started just above $20 a share. If that gap gets filled with strong upside volume flows, then ACTG will set up to tag $23 to $25 a share.

I would simply avoid ACTG 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 at $15.14 a share to more near-term support levels at $14.38 to $14.12 a share with high volume. If we get that move, then ACTG will set up to re-test or possibly take out its next major support levels at $13.14 to $13.01 a share, or even its 52-week low at $12.23 a share.

SanDisk

Another potential earnings short-squeeze trade idea is data storage products player SanDisk (SNDK), which is set to release its numbers on Wednesday after the market close. Wall Street analysts, on average, expect SanDisk to report revenue $1.49 billion on earnings of $1.25 per share.

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Just recently, Sterne Agee wrote in a note to investors that many semiconductor stocks are attractive following their recent declines. The firm said the fundamental medium to long-term outlook for semiconductor stocks hasn't changed. The companies in the sector should benefit from strong product sales, market share gains and earnings leverage. Sterne Agee thinks SanDisk should benefit from improved supply/demand dynamics in the flash memory market.

The current short interest as a percentage of the float for SanDisk is rather high at 8.4%. That means that out of the 224.14 million shares in the tradable float, 18.94 million shares are sold short by the bears. If the bulls get the earnings news they're looking for, then shares of SNDK could easily soar sharply higher post-earnings as the bears rush to cover some of their bets.

From a technical perspective, SNDK is currently trending above its 200-day moving average and below its 50-day moving average, which is neutral trendwise. This stock has been downtrending over the last few weeks, with shares moving lower from its high of $85.37 to its recent low of $73.11 a share. During that move, shares of SNDK have been making mostly lower highs and lower lows, which is bearish technical price action. That being said, shares of SNDK have managed for now to find support and form a double bottom at $73.03 to $73.11 a share.

If you're in the bull camp on SNDK, then I would wait until after its report and look for long-biased trades if this stock manages to break out back above its 50-day moving average of $76.11 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 4.15 million shares. If that breakout hits, then SNDK will set up to re-test or possibly take out its 52-week high at $85.37 a share.

I would simply avoid SNDK 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 $73.11 to $73.03 a share with high volume. If we get that move, then SNDK will set up to re-test or possibly take out its next major support levels at its 200-day moving average of $66.91 a share to $65 a share.

Home Loan Servicing Solutions

Another potential earnings short-squeeze candidate is mortgage investment player Home Loan Servicing Solutions (HLSS), which is set to release numbers on Thursday before the market open. Wall Street analysts, on average, expect Home Loan Servicing Solutions to report revenue of $204.44 million on earnings of 53 cents per share.

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The current short interest as a percentage of the float for Home Loan Servicing Solutions is pretty high at 8.3%. That means that out of the 70.02 million shares in the tradable float, 5.77 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 5.3%, or by about 288,000 shares. If the bears get caught pressing their bets into a strong quarter, then shares of HLSS could easily spike sharply higher post-earnings as the shorts jump to cover some of their positions.

From a technical perspective, HLSS 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 over the last few weeks, with shares moving between $20.90 on the downside and $22.03 on the upside. A high-volume move above the upper-end of its recent range post-earnings could triggering a decent breakout trade for shares of HLSS.

If you're bullish on HLSS, 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 at $21.93 a share and then once it clears more near-term overhead resistance at $22.03 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 758,450 shares. If that breakout starts post-earnings, then HLSS will set up to re-test or possibly take out its next major overhead resistance levels at $24 to its 52-week high at $25.59 a share. Any high-volume move above those levels will then give HLSS a chance to tag $30 a share.

I would avoid HLSS 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 its 50-day moving average of $20.94 a share to more near-term support at $20.90 a share with high volume. If we get that move, then HLSS will set up to re-test or possibly take out its next major support level at its 52-week low of $19.47 a share.

Select Comfort

Another earnings short-squeeze prospect is sleep solutions services provider Select Comfort (SCSS), which is set to release numbers on Thursday after the market close. Wall Street analysts, on average, expect Select Comfort to report revenue of $274.27 million on earnings of 32 cents per share.

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The current short interest as a percentage of the float for Select Comfort is pretty high at 7.8%. That means that out of the 53.57 million shares in the tradable float, 4.20 million shares are sold short by the bears. This is a decent 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 SCSS post-earnings.

From a technical perspective, SCSS is currently trending below both its 50-day and 200-day moving averages, which is bearish. This stock has been consolidating and trending sideways for the last two months and change, with shares moving between $16.51 on the downside and $18.60 on the upside. A high-volume move above the upper-end of its recent range post-earnings could easily trigger a big breakout trade for shares of SCSS.

If you're bullish on SCSS, 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 $17.96 a share to $18.60 to $18.66 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 992,268 shares. If that breakout hits post-earnings, then SCSS will set up to re-fill its previous gap-down-day zone from January that started just above $21 a share. If that gap gets filled with strong upside volume flows, then SCSS could easily tag another gap high of $24 a share.

I would simply avoid SCSS or look for short-biased trades if after earnings it fails to trigger that breakout and then drops below some key near-term support levels at $16.79 to $16.61 a share with high volume. If we get that move, then SCSS will set up to re-test or possibly take out its next major support level at its 52-week low of $15.31 a share.

Linear Technology

My final earnings short-squeeze play is semiconductor player Linear Technology (LLTC), which is set to release numbers on Tuesday after the market close. Wall Street analysts, on average, expect Linear Technology to report revenue of $350.01 million on earnings of 48 cents per share.

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The current short interest as a percentage of the float for Linear Technology stands at 4.4%. That means that out of the 233.16 million shares in the tradable float, 10.29 million shares are sold short by the bears. If the bulls get the earnings news they're looking for, then shares of LLTC could easily jump sharply higher post-earnings as the bears rush to cover some of their bets.

From a technical perspective, LLTC 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 moving lower from its high of $51.77 to its recent low of $46.28 a share. During that move, shares of LLTC have been making mostly lower highs and lower lows, which is bearish technical price action. That said, shares of LLTC have for now formed a double bottom at $46.28 to $46.44 a share. If that bottom holds post-earnings, then shares of LLTC could break out and trade higher.

If you're in the bull camp on LLTC, 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 $48 to $49.13 a share with high volume. Look for volume on that move that hits near or above its three-month average volume of 2.71 million shares. If that breakout hits, then LLTC will set up to re-test or possibly take out its 52-week high at $51.77 a share. Any high-volume move above that level will then give LLTC a chance to tag $55 to $60 a share.

I would avoid LLTC or look for short-biased trades if after earnings it fails to trigger that breakout, and then drops back below that double bottom support zone at $46.44 to $46.28 a share with high volume. If we get that move, then LLTC will set up to re-test or possibly take out its next major support level at its 200-day moving average of $42.35 a share to $40 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.