Stock Quotes in this Article: AEO, CRM, HGG, RENN, MY

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.

Salesforce.com

My first earnings short-squeeze trade idea is enterprise cloud computing solutions player Salesforce.com (CRM), which is set to release numbers on Tuesday after the market close. Wall Street analysts, on average, expect Salesforce.com to report revenue of $1.21 billion on earnings of 10 cents per share.

Just this morning, RBC Capital said it expects Salesforce.com's first-quarter results to beat expectations, maintaining a $75 per-share price target on stock and an outperform rating. Also, last week Morgan Stanley said Salesforce.com is a top pick of 2014 driven by secular tailwinds and free-cash flow. Morgan has an overweight rating on the stock with a $79 per share price target.

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The current short interest as a percentage of the float for Salesforce.com is pretty high at 8%. That means that out of the 565.21 million shares in the tradable float, 45.14 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 3.1%, or by about 1.33 million shares. If the bears get caught pressing their bets into a bullish quarter, then shares of CRM could easily rip sharply higher post-earnings as the shorts rush to cover some of their trades.

From a technical perspective, CRM is currently trending below both its 50-day and 200-day moving averages, which is bearish. This stock has been uptrending a bit over the last few weeks, with shares moving higher from its low of $48.18 to its recent high of $54.21 a share. During that uptrend, shares of CRM have been consistently making higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of CRM within range of triggering a near-term breakout trade post-earnings.

If you're bullish on CRM, 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 $54.21 to its 50-day moving average of $55.07 a share with high volume. Look for volume on that move that hits near or above its three-month average volume of 6.72 million shares. If that breakout hits, then CRM will set up to re-test or possibly take out its next major overhead resistance levels at $57.40 to $59.35 a share. Any high-volume move above those levels will then give CRM a chance to tag $62 to $64 a share, or even its 52-week high at $67 a share.

I would simply avoid CRM 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 $50.49 to $48.18 a share with high volume. If we get that move, then CRM will set up to re-fill some of its previous gap-up-day zone from last September that started at $42 a share.

Hhgregg

Another potential earnings short-squeeze play is electronics specialty retailer Hhgregg (HGG), which is set to release its numbers on Tuesday before the market open. Wall Street analysts, on average, expect Hhgregg to report revenue $537.96 million on a loss of 17 cents per share.

This company recently announced that it has launched a brand transformation. The firm said the brand transformation will encompass all customer touchpoints, including its 228 store locations and online presence.

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The current short interest as a percentage of the float for Hhgregg is extremely high at 56%. That means that out of the 12.14 million shares in the tradable float, 6.86 million shares are sold short by the bears. This is a gigantic short position on a stock with a very low tradable float. Any bullish earnings news could easily spark a monster short-squeeze post-earnings for shares of HGG if the bears begin to cover some of their positions.

From a technical perspective, HGG is currently trending below both its 50-day and 200-day moving averages, which is bearish. This stock recently formed a double bottom chart pattern at $8.02 to $8.03 a share. Following that bottom, shares of HGG have started to spike higher and move within range of triggering a near-term breakout trade post-earnings.

If you're in the bull camp on HGG, 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 $9.08 a share to more near-term overhead resistance levels at $9.24 to $9.38 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 420,646 shares. If that breakout triggers post-earnings, then HGG will set up to re-test or possibly take out its next major overhead resistance levels at $10.24 to 11.06 a share. Any high-volume move above those levels will then give HGG a chance to tag $11.64 to $13 a share.

I would simply avoid HGG 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 $8.03 to $8.02 a share with high volume. If we get that move, then HGG will set up to re-test or possibly take out its next major support levels at $7.39 to its 52-week low of $7.23 a share. Any high-volume move below $7.23 will then push shares of HGG into new 52-week-low territory, which is bearish technical price action.

American Eagle Outfitters

Another potential earnings short-squeeze candidate is apparel and accessories retail player American Eagle Outfitters (AEO), which is set to release numbers on Wednesday before the market open. Wall Street analysts, on average, expect American Eagle Outfitters to report revenue of $648.73 million on earnings of 2 cents per share.

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The current short interest as a percentage of the float for American Eagle Outfitters is pretty high at 13%. That means that out of the 168.48 million shares in the tradable float, 22.07 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 6.7%, or by about 1.39 million shares. If the bears get caught pressing their bets into a strong quarter, then shares of AEO could easily spike sharply higher post-earnings as the bears rush to cover some of their positions.

From a technical perspective, AEO is currently trending below both its 50-day and 200-day moving averages, which is bearish. This stock recently formed a double bottom chart pattern $10.83 to $10.77 a share. Following that bottom, shares of AEO have now started to uptrend and it recently broke out above some near-term overhead resistance levels at $11.53 to $11.76 a share. Shares of AEO are now moving within range of triggering another big breakout trade if it can manage to take out some more key overhead resistance levels post-earnings.

If you're bullish on AEO, 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 $11.87 a share to its 50-day moving average of $11.89 a share (or Tuesday's intraday high if greater) with high volume. Look for volume on that move that hits near or above its three-month average action of 5.15 million shares. If that breakout starts post-earnings, then AEO will set up to re-test or possibly take out its next major overhead resistance levels at $13 to $13.50 a share, or even its 200-day moving average of $13.87 a share.

I would avoid AEO 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 $11.50 a share with high volume. If we get that move, then AEO will set up to re-test or possibly take out its next major support levels at $10.83 to its 52-week low of $10.77 a share. Any high-volume move below $10.77 will then push shares of AEO into new 52-week-low territory, which is bearish technical price action.

China Ming Yang Wind Power Group

Another earnings short-squeeze prospect is megawatt-class wind turbines maker China Ming Yang Wind Power Group (MY), which is set to release numbers on Tuesday after the market close. There are currently no Wall Street analysts' estimates available for this company.

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The current short interest as a percentage of the float for China Ming Yang Wind Power Group is notable at 4.4%. That means that out of the 68.15 million shares in the tradable float, 3.32 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 4%, or by about 127,000 shares. If the bears get caught pressing their bets into a bullish quarter, then shares of MY could easily explode sharply higher post-earnings as the shorts jump to cover some of their trades.

From a technical perspective, MY 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 uptrending a bit over the last few weeks, with shares moving higher from its low of $2.16 to its recent high of $2.79 a share. During that uptrend, shares of MY have been making mostly higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of MY within range of triggering a big breakout trade post-earnings.

If you're bullish on MY, 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 $2.84 a share and then once it clears more near-term resistance levels at $3.07 to $3.14 a share with high volume. Look for volume on that move that hits near or above its three-month average action o 1.89 million shares. If that breakout hits, then MY will set up to re-test or possibly take out its next major overhead resistance levels at $3.71 to $4.20 a share, or even its 52-week high of $4.34 a share.

I would simply avoid MY or look for short-biased trades if after earnings it fails to trigger that breakout and then drops back below its 200-day moving average of $2.50 a share with high volume. If we get that move, then MY will set up to re-test or possibly take out its next major support levels at $2.16 to $2 a share, or even $1.91 a share.

Renren

My final earnings short-squeeze play is China-based social networking Internet platform player Renren (RENN), which is set to release numbers on Wednesday after the market close Wall Street analysts, on average, expect Renren to report revenue of $25.49 million on a loss of 6 cents per share.

The current short interest as a percentage of the float for Renren stands at 6.6%. That means that out of the 136.38 million shares in the tradable float, 9.46 million shares are sold short by the bears. If this company can deliver the earnings news the bulls are looking for, then shares of RENN could easily rip sharply higher post-earnings as the shorts rush to cover some of their bets.

From a technical perspective, RENN is currently trending below both its 50-day and 200-day moving averages, which is bearish. This stock has trending sideways and consolidating for the last two months, with shares moving between $3.12 on the downside and $3.59 on the upside. Any high-volume move above the upper-end of its recent range post-earnings could trigger a big breakout trade for shares of RENN.

If you're in the bull camp on RENN, 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 $3.41 to some more near-term overhead resistance levels at $3.49 to $3.59 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 2.27 million shares. If that breakout materializes post-earnings, then RENN will set up to re-test or possibly take out its next major overhead resistance levels at $4.20 to its 52-week high at $4.79 a share.

I would avoid RENN 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 $3.20 to $3.12 a share with high volume. If we get that move, then RENN will set up to re-test or possibly take out its next major support levels at $3 to $2.85 a share, or even its 52-week low at $2.75 share. Any high-volume move below $2.75 will then push shares of RENN into new 52-week-low territory, which is bearish technical price action.

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.