Stock Quotes in this Article: CLC, KMX, PIR, SWHC, BBRY

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.

Pier 1 Imports

My first earnings short-squeeze trade idea is home furnishings retailer Pier 1 Imports (PIR), which is set to release numbers on Thursday before the market open. Wall Street analysts, on average, expect Pier 1 Imports to report revenue of $422.43 million on earnings of 20 cents per share.

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The current short interest as a percentage of the float for Pier 1 Imports is notable at 6%. That means that out of the 93.21 million shares in the tradable float, 5.59 million shares are sold short by the bears. If this company can deliver the earnings news the bulls are looking for, then shares of PIR could easily rip sharply higher post-earnings as the bears jump to cover some of their bets.

From a technical perspective, PIR is currently trending above its 50-day moving average and below its 200-day moving average, which is neutral trendwise. This stock has just started to cross back above its 50-day today, and that move is starting to push shares of PIR within range of triggering a big breakout trade post-earnings.

If you're bullish on PIR, 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 $18.64 to $19.32 and then once it clears more resistance at $19.88 to $20.08 a share with high volume. Look for volume on that move that hits near or above its three-month average volume of 1.74 million shares. If that breakout hits post-earnings, then PIR will set up to re-fill some of its previous gap-down-day zone from January that started near $23.50 a share.

I would simply avoid PIR 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 $17.82 a share and then below its 52-week low of $16.86 a share high volume. If we get that move, then PIR will set up to enter new 52-week-low territory, which is bearish technical price action. Some possible downside targets off that move are $15 to $14 a share.

BlackBerry

Another potential earnings short-squeeze play is wireless communications solutions provider BlackBerry (BBRY), which is set to release its numbers on Thursday before the market open. Wall Street analysts, on average, expect BlackBerry to report revenue $971.80 million on a loss of 25 cents per share.

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The current short interest as a percentage of the float for BlackBerry is extremely high at 19%. That means that out of the 479.01 million shares in the tradable float, 93.43 million shares are sold short by the bears. If the bulls get the earnings news they're looking for, then shares of BBRY could easily explode sharply higher post-earnings as the bears rush to cover some of their positions.

From a technical perspective, BBRY 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 over the last month, with shares moving higher from its low of $7.16 to its recent high of $8.23 a share. During that uptrend, shares of BBRY have been consistently making higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of BBRY within range of triggering a major breakout trade post-earnings.

If you're in the bull camp on BBRY, then I would wait until after its report and look for long-biased trades if this stock manages to break out above some key overhead resistance levels at $8.23 to $8.44 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 12.19 million shares. If that breakout materializes post-earnings, then BBRY will set up to re-test or possibly take out its next major overhead resistance levels at $9.61 to $9.71 a share. Any high-volume move above those levels will then give BBRY a chance to tag $11 a share.

I would simply avoid BBRY 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 $7.54 a share with high volume. If we get that action, then BBRY will set up to re-test or possibly take out its next major support levels at $7.16 to $7.01 a share. Any high-volume move below those levels will then give BBRY a chance to tag $6 a share.

CarMax

Another potential earnings short-squeeze candidate is used vehicles retailer CarMax (KMX), which is set to release numbers on Friday before the market open. Wall Street analysts, on average, expect CarMax to report revenue of $3.60 billion on earnings of 67 cents per share.

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The current short interest as a percentage of the float for CarMax is notable at 5.5%. That means that out of the 220.80 million shares in the tradable float, 11.96 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 4.4%, or by about 499,000 shares. If the bears get caught pressing their bets into a bullish quarter, then shares of KMX could easily jump sharply higher post-earnings as the shorts rush to cover some of their trades.

From a technical perspective, KMX is currently trending just above its 50-day moving average and below its 200-day moving average, which is neutral trendwise. This stock recently formed a double bottom chart pattern at $43.72 to $43.80 a share. Shares of KMX are now starting to bounce modestly off those support levels and it's beginning to move within range of triggering a big breakout trade post-earnings.

If you're bullish on KMX, 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 $46.57 to its 200-day moving average of $47.28 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 1.56 million shares. If that breakout starts post-earnings, then KMX will set up to re-test or possibly take out its next major overhead resistance levels at $49.68 a share. Any high-volume move above that level will then give KMX a chance to re-fill some of its previous gap-down-day zone from December that started at $53 a share.

I would avoid KMX 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 $43.80 to $43.72 a share with high volume. If we get that move, then KMX will set up to re-test or possibly take out its 52-week low of $42.21 a share. Any high-volume move below that level will then push KMX into new 52-week-low territory, which is bearish technical price action. Some possible downside targets of that move are $40 to $37.50 a share.

Smith & Wesson

Another earnings short-squeeze prospect is firearms manufacturer Smith & Wesson (SWHC), which is set to release numbers on Thursday after the market close. Wall Street analysts, on average, expect Smith & Wesson to report revenue of $163.55 million on earnings of 39 cents per share.

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The current short interest as a percentage of the float for Smith & Wesson is extremely high at 31%. That means that out of the 53.95 million shares in the tradable float, 16.89 million shares are sold short by the bears. This is a huge short interest on a stock with a relatively low tradable float. Any bullish earnings news could easily send shares of SWHC soaring higher post-earnings as the bears rush to cover some of their trades.

From a technical perspective, SWHC 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 three months and change, with shares moving higher from its low of $11.31 to its recent high of $17.28 a share. During that uptrend, shares of SWHC have been consistently making higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of SWHC within range of triggering a big breakout trade post-earnings.

If you're bullish on SWHC, 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 $17.28 a share with high volume. Look for volume on that move that hits near or above its three-month average volume of 1.34 million shares. If that breakout kicks off post-earnings, then SWHC will set up to enter new 52-week-high territory, which is bullish technical price action. Some possible upside targets off that move are $20 to $23 a share.

I would simply avoid SWHC 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 $15.42 a share with high volume. If we get that move, then SWHC will set up to re-test or possibly take out its next major support levels at $13.50 to its 200-day moving average of $13.13 a share.

Clarcor

My final earnings short-squeeze play is pollution and treatment controls products provider Clarcor (CLC), which is set to release numbers on Wednesday after the market close. Wall Street analysts, on average, expect Clarcor to report revenue of $364.30 million on earnings of 62 cents per share.

The current short interest as a percentage of the float for Clarcor sits at 3.4%. That means that out of the 50.15 million shares in the tradable float, 1.71 million shares are sold short by the bears. This isn't a huge short interest, but it's more than enough to spark a decent short-covering rally post-earnings if Clarcor can deliver the earnings news the bulls are looking for.

From a technical perspective, CLC is currently trending above both its 50-day and 200-day moving averages, which is bullish. This stock has uptrending a bit for the last two months, with shares moving higher from its low of $54.16 to its recent high of $59.96 a share. During that uptrend, shares of CLC have been making mostly higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of CLC within range of triggering a big breakout trade post-earnings.

If you're in the bull camp on CLC, 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 $59.96 a share with high volume. Look for volume on that move that hits near or above its three-month average volume of 266,694 shares. If that breakout triggers post-earnings, then CLC will set up to re-fill some of its previous gap-down-day zone from January that started near $65 a share.

I would avoid CLC 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 $57.23 a share with high volume. If we get that move, then CLC will set up to re-test or possibly take out its next major support levels at $54 to $52.54 a share. Any high-volume move below those levels will then give CLC a chance to re-test or possibly take out its 52-week low $50.92 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.