Stock Quotes in this Article: CPST, FNSR, LULU, OXM, RH

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.

Lululemon Athletica

My first earnings short-squeeze trade idea is athletic apparel player Lululemon Athletica (LULU), which is set to release numbers on Thursday before the market open. Wall Street analysts, on average, expect Lululemon Athletica to report revenue of $376.04 million on earnings of 33 cents per share.

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Recently, Sterne Agee upgraded shares of LULU to neutral from underperform based on valuation but said that challenges remain and same-store-sales are unlikely to exceed mid-single digits until 2016.

The current short interest as a percentage of the float for Lululemon Athletica is extremely high at 23%. That means that out of the 134.74 million shares in the tradable float, 24.67 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 4.3%, or by about 1.02 million shares. If the bears get caught pressing their bets into a strong quarter, then shares of LULU could easily soar sharply higher post-earnings as the bears jump to cover some of their trades.

From a technical perspective, LULU 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 $42.28 to $42.62 a share. Following that bottom, shares of LULU have started uptick a bit and it's now quickly moving within range of triggering a major breakout trade above some key near-term overhead resistance levels post-earnings.

If you're bullish on LULU, 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 $46.78 to its 50-day moving average of $47.42 a share with high volume. Look for volume on that move that hits near or above its three-month average volume of 2.99 million shares. If that breakout begins post-earnings, then LULU will set up to re-test or possibly take out its next major overhead resistance levels at $52.50 to $55 a share, or even its 200-day moving average of $58.10 a share.

I would simply avoid LULU or look for short-biased trades if after earnings it fails to trigger that breakout and then drops back below those double bottom support areas at $42.62 to $42.28 a share high volume. If we get that move, then LULU will set up to enter new 52-week-low territory below $42.28 a share, which is bearish technical price action.

Restoration Hardware

Another potential earnings short-squeeze play is home furnishings retailer Restoration Hardware (RH), which is set to release its numbers on Wednesday after the market close. Wall Street analysts, on average, expect Restoration Hardware to report revenue $348.49 million on earnings of 11 cents per share.

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The current short interest as a percentage of the float for Restoration Hardware is very high at 14%. That means that out of the 35.06 million shares in the tradable float, 5.01 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 252,000 shares. If the bears get caught pressing their bets into a bullish quarter, then shares of RH could easily trend sharply higher post-earnings as the bears rush to cover some of their positions.

From a technical perspective, RH is currently trending above both its 50-day and 200-day moving averages, which is bullish. This stock has been uptrending over the last month, with shares moving higher from its low of $59.31 to its recent high of $70.43 a share. During that uptrend, shares of RH have been consistently making higher lows and higher highs, which is bullish technical price action. Shares of RH are now starting to trend within range of triggering a big breakout trade post-earnings.

If you're in the bull camp on RH, 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 $72 to $76.10 a share and then once it clears its all-time high of $78.50 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 974,703 shares. If that breakout triggers post-earnings, then RH will set up to enter new all-time-high territory above $78.50, which is bullish technical price action. Some possible upside targets off that breakout are $85 to $90 a share, or even north of $90 a share.

I would simply avoid RH 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 at $65.88 to its 50-day moving average of $65.49 a share and then below more key support at $63.26 a share with high volume. If we get that move, then RH will set up to re-test or possibly take out its next major support levels at $60.83 to $60 a share, or even $59 to $57 a share.

Finisar

Another potential earnings short-squeeze candidate is networking and communications devices player Finisar (FNSR), which is set to release numbers on Thursday after the market close. Wall Street analysts, on average, expect Finisar to report revenue of $303.20 million on earnings of 38 cents per share.

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The current short interest as a percentage of the float for Finisar is extremely high at 17%. That means that out of the 95.27 million shares in the tradable float, 16.23 million shares are sold short by the bears. If the bulls get the earnings news they're looking for, then shares of FNSR could easily rip sharply higher post-earnings as the bears rush to cover some of their bets.

From a technical perspective, FNSR 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 $22.12 to $22.60 a share. Since tagging that bottom, shares of FNSR have started to uptrend a bit and move back above its 200-day moving average. That move has now pushed shares of FNSR within range of triggering a big breakout trade post-earnings.

If you're bullish on FNSR, 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 $25.15 to $25.23 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 2.64 million shares. If that breakout materializes after earnings, then FNSR will set up to re-test or possibly take out its 52-week high of $28.85 a share.

I would avoid FNSR 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 $23.68 to $22.60 a share with high volume. If we get that move, then FNSR will set up to re-test or possibly take out its next major support levels at $22.12 to $20.89 a share, or even $19.43 a share.

Capstone Turbine

Another earnings short-squeeze prospect is microturbine technology solutions developer and manufacturer Capstone Turbine (CPST), which is set to release numbers on Thursday after the market close. Wall Street analysts, on average, expect Capstone Turbine to report revenue of $38.87 million on a loss of 1 cent per share.

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The current short interest as a percentage of the float for Capstone Turbine is extremely high at 16%. That means that out of the 307.29 million shares in the tradable float, 52.19 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 9.1%, or by about 4.36 million shares. If the bears get caught pressing their bets into a strong quarter, then shares of CPST could easily explode sharply higher post-earnings as the bears jump to cover some of their trades.

From a technical perspective, CPST 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 for the last month, with shares moving higher from its low of $1.28 to its recent high of $1.62 a share. During that move, shares of CPST have been making mostly higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of CPST within range of triggering a near-term breakout trade post-earnings.

If you're bullish on CPST, 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 $1.70 to its 50-day moving average of $1.78 a share with strong volume. Look for volume on that move that hits near or above its three-month average action of 8.36 million shares. If that breakout hits post-earnings, then CPST will set up to re-test or possibly take out its next major overhead resistance levels at $1.90 to $2.25 a share, or even its 52-week high at $2.60 a share.

I would simply avoid CPST 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 $1.52 a share with high volume. If we get that move, then CPST will set up to re-test or possibly take out its next major support levels at $1.45 to $1.35 a share, or even $1.28 a share.

Oxford Industries

My final earnings short-squeeze play is apparel player Oxford Industries (OXM), which is set to release numbers on Tuesday after the market close. Wall Street analysts, on average, expect Oxford Industries to report revenue of $254.57 million on earnings of 87 cents per share.

Just recently, Sidoti upgraded shares of Oxford Industries to buy from neutral and slapped an $88 per share price target on the stock. Also recently, Brean Capital said the weakness in Oxford Industries is a buying opportunity.

The current short interest as a percentage of the float for Oxford Industries sits at 6%. That means that out of the 14.49 million shares in the tradable float, 745,000 shares are sold short by the bears. This is a decent short interest on a stock with a very low tradable float. Any bullish earnings news could easily spark a sharp short-covering rally for shares of OXM post-earnings.

From a technical perspective, OXM 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 uptrending for the last month, with shares moving higher from its low of $60.69 to its recent high of $69.52 a share. During that uptrend, shares of OXM have been consistently making higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of OXM within range of triggering a near-term breakout trade post-earnings.

If you're in the bull camp on OXM, 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 $70.20 a share and then once it clears its 200-day moving average of $71.44 a share with high volume. Look for volume on that move that hits near or above its three-month average volume of 83,450 shares. If that breakout starts post-earnings, then OXM will set up to re-test or possibly take out its next major overhead resistance levels at $79 to $82.50 a share.

I would avoid OXM 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 $67.33 a share with high volume. If we get that move, then OXM will set up to re-test or possibly take out its next major support levels at $62.97 to $60.69 a share. Any high-volume move below those levels will then give OXM a chance to re-test its 52-week low of $57.86 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.