Stock Quotes in this Article: AZZ, BBBY, FINL, KBH, LEN

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.

Bed Bath & Beyond

My first earnings short-squeeze play is home furnishing retail stores operator Bed Bath & Beyond (BBBY), which is set to release numbers on Wednesday after the market close. Wall Street analysts, on average, expect Bed Bath & Beyond to report revenue of $2.69 billion on earnings of 95 cents per share. Just today, UBS decreased its price target on Bed Bath & Beyond to $65 and slapped a neutral rating on the stock.

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The current short interest as a percentage of the float for Bed Bath & Beyond is notable at 4.9%. That means that out of the 195.31 million shares in the tradable float, 9.57 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 24.6%, or by about 1.88 million shares. If the bears get caught pressing their bets into a bullish quarter, then shares of BBBY could easily rip sharply higher post-earnings as the bears rush to cover some of their trades.

From a technical perspective, BBBY is currently trending below both its 50-day and 200-day moving averages, which is bearish. This stock has recently formed a triple bottom chart pattern at $60.55, $60.29 and $59.89 a share. Shares of BBBY are now starting to spike modestly higher off those support levels and it's quickly moving within range of triggering a big breakout trade post-earnings.

If you're bullish on BBBY, 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 $61.67 to $63.03 a share with high volume. Look for volume on that move that hits near or above its three-month average volume of 2.76 million shares. If that breakout hits post-earnings, then BBBY will set up to re-test or possibly take out its next major overhead resistance level at $65.14 a share. Any high-volume move above that level will then give BBBY a chance to re-fill some of its previous gap-down-day zone from April that started above $68 a share.

I would simply avoid BBBY or look for short-biased trades if after earnings it fails to trigger that breakout and then drops back below its 52-week low of $59.89 a share high volume. If we get that move, then BBBY will set up to re-test or possibly take out its next major support levels at $55 to $54, or even $53 a share.

KB Home

Another potential earnings short-squeeze trade idea is homebuilding player KB Home (KBH), which is set to release its numbers on Friday before the market open. Wall Street analysts, on average, expect KB Home to report revenue $563.10 million on earnings of 20 cents per share.

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Recently, RBC Capital predicted that KB Home's second quarter EPS and homebuilding revenue should surpass consensus estimates. The firm thinks the company can benefit from strong volumes, gross margin expansion and solid price increases. RBC maintained an outperform rating on the stock.

The current short interest as a percentage of the float for KB Home is extremely high at 24%. That means that out of the 67.75 million shares in the tradable float, 16.85 shares are sold short by the bears. This is a stock with a big short interest and a relatively 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 positions.

From a technical perspective, KBH 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 and change, with shares moving higher from its low of $15.40 to its intraday high of $18.03 a share. During that uptrend, shares of KBH have been consistently making higher lows and higher highs, which is bullish technical price action. That move has now started to push shares of KBH within range of triggering a big breakout trade post-earnings.

If you're in the bull camp on KBH, 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 $19.41 to its 52-week high of $20.78 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 3.85 million shares. If that breakout kicks off post-earnings, then KBH will set up to enter new 52-week-high territory, which is bullish technical price action. Some possible upside targets off that breakout are $25 to $30 a share.

I would simply avoid KBH or look for short-biased trades if after earnings it fails to trigger that breakout and then drops back below both its 200-day moving average of $17.38 a share and its 50-day moving average of $16.55 a share with high volume. If we get that move, then KBH will set up to re-test or possibly take out its next major support level at its 52-week low of $15.40 a share.

Finish Line

Another potential earnings short-squeeze candidate is specialty retailer of athletic shoes, apparel and accessories Finish Line (FINL), which is set to release numbers on Friday before the market open. Wall Street analysts, on average, expect Finish Line to report revenue of $394.17 million on earnings of 21 cents per share.

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Recently, Canaccord predicted that first-quarter results for Finish Line should be in-line with expectations. The firm continues to see solid momentum coupled with improved execution and easy second-quarter comps. Canaccord has a buy rating on shares of FINL with a $32-per-share price target.

The current short interest as a percentage of the float for Finish Line is notable at 6.8%. That means that out of the 47.11 million shares in the tradable float, 3.21 million shares are sold short by the bears. If the bulls get the earnings news they're looking for, then shares of FINL could easily soar sharply higher post-earnings as the bears jump to cover some of their trades.

From a technical perspective, FINL is currently trending above both its 50-day and 200-day moving averages, which is bullish. This stock has been uptrending strong over the last five months, with shares moving higher from its low of $22.86 to its recent high of $30.48 a share. During that uptrend, shares of FINL have been consistently making higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of FINL within range of triggering a big breakout trade post-earnings.

If you're bullish on FINL, 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 $30.42 a share to its 52-week high at $30.48 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 action of 660,530 shares. If that breakout materializes post-earnings, then FINL will set up to enter new 52-week-high territory, which is bullish technical price action. Some possible upside targets off that breakout are $35 to $40 a share.

I would avoid FINL or look for short-biased trades if after earnings it fails to trigger that breakout and then drops back below 50-day moving average of $28.51 a share with high volume. If we get that move, then FINL will set up to re-test or possibly take out its next major support levels at its 200-day moving average of $26.31 to $25 a share.

AZZ

Another earnings short-squeeze prospect is electrical equipment maker and engineered services provider AZZ (AZZ), which is set to release numbers on Friday before the market open. Wall Street analysts, on average, expect AZZ to report revenue of $191.37 million on earnings of 54 cents per share.

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The current short interest as a percentage of the float for AZZ is notable at 5.7%. That means that out of the 24.76 million shares in the tradable float, 1.43 million shares are sold short by the bears. If this company can deliver the earnings news the bulls are looking for, then shares of AZZ could easily spike sharply higher post-earnings as the bears move to cover some of their trades.

From a technical perspective, AZZ is currently trending above both its 50-day and 200-day moving averages, which is bullish. This stock has been trending sideways and consolidating for the last three months, with shares moving between $41.37 on the downside and $46.67 on the upside. Shares of AZZ are now starting to spike higher right off both its 50-day and 200-day moving averages and that move is starting to push shares of AZZ within range of triggering a big breakout trade above the upper-end of its recent sideways trading chart pattern.

If you're bullish on AZZ, 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 $46.04 to $46.67 a share with strong volume. Look for volume on that move that hits near or above its three-month average action of 100,958 shares. If that breakout triggers post-earnings, then AZZ will set up to re-test or possibly take out its 52-week high at $49.64 a share. Any high-volume move above that level will then give AZZ a chance to trend north of $50 a share.

I would simply avoid AZZ 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 $43.55 to $43.12 a share with high volume. If we get that move, then AZZ will set up to re-test or possibly take out its next major support levels at $42 to $41 a share, or even $40 a share.

Lennar

My final earnings short-squeeze play is homebuilding player Lennar (LEN), which is set to release numbers on Thursday before the market open. Wall Street analysts, on average, expect Lennar to report revenue of $1.68 billion on earnings of 51 cents per share.

Just this morning, Cleveland Research said Lennar has modest risk to new-home volumes but that that will largely be offset with margin progress and share gains. Cleveland Research thinks Lennar is positioned to outperform.

The current short interest as a percentage of the float for Lennar is very high at 14.4%. That means that out of the 178.19 million shares in the tradable float, 25.73 million shares are sold short by the bears. If Lennar can deliver the earnings news the bulls are looking for, then shares of LEN could easily surge sharply higher post-earnings as the shorts jump to cover some of their bets.

From a technical perspective, LEN is currently trending above both its 50-day and 200-day moving averages, which is bullish. This stock is starting to spike higher right above its 50-day moving average of $39.69 a share. That move is beginning to push shares of LEN within range of triggering a major breakout trade post-earnings above some key overhead resistance levels.

If you're in the bull camp on LEN, 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 $42.28 to $42.68 a share and then once it clears its 52-week high of $44.40 a share with high volume. Look for volume on that move that hits near or above its three-month average volume of 3.15 million shares. If that breakout gets underway post-earnings, then LEN will set up to enter new 52-week-high territory above $44.40 a share, which is bullish technical price action. Some possible upside targets off that breakout are $50 to $55, or even $60 a share.

I would avoid LEN 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 $39.69 a share with high volume. If we get that move, then LEN will set up to re-test or possibly take out its next major support levels at its 200-day moving average of $38.07 to $36.33 a share. Any high-volume move below those levels will then give LEN a chance to tag $34 to $32 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.