Stock Quotes in this Article: BRLI, DMND, NAV, PAY, TITN

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.

Diamond Foods

My first earnings short-squeeze play is packaged food player Diamond Foods (DMND), which is set to release numbers on Thursday after the market close. Wall Street analysts, on average, expect Diamond Foods to report revenue of $191.72 million on earnings of 17 cents per share.

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The current short interest as a percentage of the float for Diamond Foods is very high at 16%. That means that out of the 26.14 million shares in the tradable float, 4.19 million shares are sold short by the bears. This is a low float high short-interest situation with shares of DMND. Any bullish earnings news could easily be a catalyst for large short-squeeze that sends shares of DMND ripping sharply higher post-earnings.

From a technical perspective, DMND is currently trending above its 200-day moving average and just below its 50-day moving average, which is neutral trendwise. This stock recently formed a double bottom chart pattern at $29.41 to $29.82 a share. Following that bottom, shares of DMND have started to uptrend and it's now quickly approaching a big breakout trade post-earnings.

If you're bullish on DMND, 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 $32.37 to $33.16 a share with high volume. Look for volume on that move that hits near or above its three-month average volume of 342,662 shares. If that breakout hits, then DMND will set up to re-test or possibly take out its 52-week high at $35.58 a share.

I would simply avoid DMND 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 $31 a share high volume. If we get that move, then DMND will set up to re-test or possibly take out its next major support levels at $29.82 to $29.41 a share. Any high-volume move below those levels will then give DMND a chance to tag its 200-day moving average of $26.64 a share.

Titan Machinery

Another potential earnings short-squeeze trade idea is full service agricultural and construction equipment stores operator Titan Machinery (TITN), which is set to release its numbers on Thursday before the market open. Wall Street analysts, on average, expect Titan Machinery to report revenue $411.57 million on a loss of 6 cents per share.

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The current short interest as a percentage of the float for Titan Machinery is very high at 28%. That means that out of the 17.10 million shares in the tradable float, 4.88 million shares are sold short by the bears. This stock has a monster short interest and a very low tradable float. Any bullish earnings news could easily spark a large short-squeeze post-earnings that forces the bears to cover some of their bets.

From a technical perspective, TITN is currently trending above both its 50-day and 200-day moving averages, which is bullish. This stock has been uptrending for the last few weeks, with shares moving higher from its low of $15.41 to its recent high of $18.25 a share. During that uptrend, shares of TITN have been consistently making higher lows and higher highs, which is bullish technical price action. Shares of TITN are now starting to move within range of triggering a near-term breakout trade post-earnings.

If you're in the bull camp on TITN, 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 $18.25 a share with high volume. Look for volume on that move that registers near or above its three-month average action of 241,895 shares. If that breakout hits post-earnings, then TITN will set up to re-test or possibly take out its 52-week high at $21.23 a share. Any high-volume move above that level will then give TITN a chance to tag $24 a share.

I would simply avoid TITN or look for short-biased trades if after earnings it fails to trigger that breakout and then drops back below both its 50-day moving average of $16.86 a share and its 200-day moving average of $16.77 a share with high volume. If we get that move, then TITN will set up to re-test or possibly take out its next major support levels at $15.41 to $14.57 a share, or even its 52-week low of $14.19 a share.

Navistar International

Another potential earnings short-squeeze candidate is truck and engine maker Navistar International (NAV), which is set to release numbers on Wednesday before the market open. Wall Street analysts, on average, expect Navistar International to report revenue of $2.71 billion on a loss of $1.31 per share.

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Just recently, Morgan Stanley issued a report that said Navistar International's execution has recently been the weakest in the machinery group, as the company has missed its EBITDA targets in four of the last five quarters. The firm also said it views liquidity as a problem, as NAV sold $370 million of 4.75% convertible notes in the second quarter of 2014. Morgan has an equal-weight rating on the stock and a $38 per share price target.

The current short interest as a percentage of the float for Navistar International is extremely high at 29%. That means that out of the 39.71 million shares in the tradable float, 11.52 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 2.4%, or by about 269,000 shares. If the bears get caught pressing their bets into a bullish quarter, then shares of NAV could easily rip sharply higher post-earnings as the shorts rush to cover some of their trades.

From a technical perspective, NAV is currently trending below both its 50-day and 200-day moving averages, which is bearish. This stock has been downtrending over the last month, with shares moving lower from its high of $38.56 to its recent low of $32.45 a share. During that downtrend, shares of NAV have been making mostly lower highs and lower lows, which is bearish technical price action. That said, shares of NAV are still trending within range of triggering a near-term breakout trade post-earnings if its short-term trend can improve.

If you're bullish on NAV, 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 $35.20 to $35.95 a share and then once it clears its 200-day moving average of $36.16 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 1.25 million shares. If that breakout materializes after earnings, then NAV will set up to re-test or possibly take out its next major overhead resistance levels at $38.56 to $39.45 a share, or even its 52-week high at $41.57 a share.

I would avoid NAV 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 $32.45 to $31.51 a share share with high volume. If we get that move, then NAV will set up to re-test or possibly take out its next major support levels at $29.08 a share to its 52-week low of $25.56 a share.

Bio-Reference Laboratories

Another earnings short-squeeze prospect is clinical laboratory testing services player Bio-Reference Laboratories (BRLI), which is set to release numbers on Thursday before the market open. Wall Street analysts, on average, expect Bio-Reference Laboratories to report revenue of $195.64 million on earnings of 32 cents per share.

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The current short interest as a percentage of the float for Bio-Reference Laboratories is extremely high at 32.8%. That means that out of the 24.54 million shares in the tradable float, 8.05 million shares are sold short by the bears. If this company can deliver the earnings news the bulls are looking for, then shares of BRLI could easily soar sharply higher post-earnings as the bears jump to cover some of their bets.

From a technical perspective, BRLI is currently trending below both its 50-day and 200-day moving averages, which is bearish. This stock has been uptrending over the last few weeks, with shares moving higher from its low of $24.19 a share to its recent high of $27.68 a share. During that uptrend, shares of BRLI have been consistently making higher lows and higher highs, which is bullish technical price action. That said, shares of BRLI have started to pullback a bit off that recent high of $27.68 a share, but it's still trending within range of triggering a major breakout trade post-earnings.

If you're bullish on BRLI, 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 $27.68 to $28.56 a share and then once it clears more key resistance at $29.02 a share with strong volume. Look for volume on that move that registers near or above its three-month average action of 285,273 shares. If that breakout starts post-earnings, then BRLI will set up to re-test or possibly take out its next major overhead resistance level at $35 a share.

I would simply avoid BRLI 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 to $24.19 a share and then below its 52-week low of $24.13 a share with high volume. If we get that move, then BRLI will set up to enter new 52-week-low territory below $24.13, which is bearish technical price action.

VeriFone Systems

My final earnings short-squeeze play is electronic payment solutions player VeriFone Systems (PAY), which is set to release numbers on Thursday after the market close. Wall Street analysts, on average, expect VeriFone Systems to report revenue of $443.42 million on earnings of 33 cents per share.

Just recently, Susquehanna downgraded shares of VeriFone to neutral with a $34 per share price target, citing valuation. Also recently, Jefferies said shares of VeriFone have ample upside potential.

The current short interest as a percentage of the float for VeriFone Systems sits at 3.6%. That means that out of the 110.50 million shares in the tradable float, 3.97 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 2.4%, or by about 3.88 million shares. If the bears get caught pressing their bets into a strong quarter, then shares of PAY could easily rip sharply higher post-earnings as the shorts jump to cover some of their trades.

From a technical perspective, PAY 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 six months, with shares moving higher from its low of $22.60 to its recent high of $35.38 a share. During that uptrend, shares of PAY have been consistently making higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of PAY within range of triggering a major breakout trade post-earnings.

If you're in the bull camp on PAY, then I would wait until after its report and look for long-biased trades if this stock manages to break out above its 52-week high of $35.38 a share (or above Thursday's intraday high if greater) with high volume. Look for volume on that move that hits near or above its three-month average volume of 1.63 million shares. If that breakout kicks off post-earnings, then PAY will set up to enter new 52-week-high territory, which is bullish technical price action. Some possible upside targets off that move are $45 to $50 a share.

I would avoid PAY 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 $33.13 a share with high volume. If we get that move, then PAY will set up to re-test or possibly take out its next major support levels at $31 to $30.19 a share. Any high-volume move below those levels will then set up PAY to re-test or possibly take out its next major support levels at $28 to its 200-day moving average of $27.31 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.