Stock Quotes in this Article: AA, BOBE, MSM, CUDA, TCS

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.

Bob Evans Farms

My first earnings short-squeeze play is full-service restaurant owner and operator Bob Evans Farms (BOBE), which is set to release numbers on Tuesday after the market close. Wall Street analysts, on average, expect Bob Evans Farms to report revenue of $333.31 million on earnings of 41 cents per share.

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The current short interest as a percentage of the float for Bob Evans Farms is very high at 16%. That means that out of the 22.27 million shares in the tradable float, 3.69 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 2.3%, or by about 85,000 shares. If the bears get caught pressing their bets into a bullish quarter, then shares of BOBE could easily jump sharply higher post-earnings as the shorts rush to cover some of their trades.

From a technical perspective, BOBE 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 $44.24 to its recent high of $51.29 a share. During that uptrend, shares of BOBE have been consistently making higher lows and higher highs, which is bullish technical price action. That move has how pushed shares of BOBE within range of triggering a big breakout trade post-earnings.

If you're bullish on BOBE, 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 $51.29 to $51.59 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 376,437 shares. If that breakout materializes post-earnings, then BOBE will set up to re-test or possibly take out its next major overhead resistance levels at $55.86 to $57.89 a share, or even its 52-week high at $60.22 a share.

I would simply avoid BOBE or look for short-biased trades if after earnings it fails to trigger that breakout and then drops back below some near-term support levels at $49 to its 50-day moving average at $47.94 a share with high volume. If we get that move, then BOBE will set up to re-test or possibly take out its next major support levels $44.24 to $42.90 a share.

Container Store Group

Another potential earnings short-squeeze trade idea is storage and organization products specialty retail player Container Store Group (TCS), which is set to release its numbers on Tuesday after the market close. Wall Street analysts, on average, expect Container Store Group to report revenue $174.21 million on a loss of 6 cents per share.

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The current short interest as a percentage of the float for Container Store Group is extremely high at 29%. That means that out of the 16.67 million shares in the tradable float, 4.92 million shares are sold short by the bears. If the bulls get the earnings news they're looking for, then shares of TCS could easily explode to the upside post-earnings as the bears jump to cover some of their positions.

From a technical perspective, TCS is currently trending below its 50-day moving average, which is bearish. This stock has been downtrending badly for the last six months, with shares falling sharply from its high of $39.48 to its recent low of $25.16 a share. During that downtrend, shares of TCS have been making mostly lower highs and lower lows, which is bearish technical price action. That said, shares of TCS have recently bounced higher off that $25.16 low and it's now trending within range of triggering a near-term breakout trade post-earnings.

If you're in the bull camp on TCS, 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 $27.71 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 429,761 shares. If that breakout hits post-earnings, then TCS will set up to re-test or possibly take out its next major overhead resistance levels at $30.35 to $32.68 a share. Any high-volume move above those levels will then give TCS a chance to tag $35 to $37 a share.

I would simply avoid TCS 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 $26.26 to its all-time low of $25.16 a share with high volume. If we get that action, then TCS will set up to enter new all-time-low territory, which is bearish technical price action. Some possible downside targets off that move are $20 to $17 a share.

Alcoa

Another potential earnings short-squeeze candidate is leading aluminum producer Alcoa (AA), which is set to release numbers on Tuesday after the market close. Wall Street analysts, on average, expect Alcoa to report revenue of $5.64 billion on earnings of 12 cents per share.

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The current short interest as a percentage of the float for Alcoa is notable at 5.9%. That means that out of the 1.17 billion shares in the tradable float, 67.17 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 4.1%, or by about 2.77 million shares. If the bears get caught pressing their bets into a strong quarter, then shares of AA could easily jump sharply higher post-earnings as the shorts rush to cover some of their trades.

From a technical perspective, AA 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 $9.78 to its recent high of $15.18 a share. During that uptrend, shares of AA have been consistently making higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of AA within range of triggering a big breakout trade post-earnings.

If you're bullish on AA, 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 $15.18 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 16.24 million shares. If that breakout gets underway post-earnings, then AA will set up to enter new 52-week-high territory, which is bullish technical price action. Some possible upside targets off that breakout are $20 to north of $20 a share.

I would avoid AA 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 $13.97 a share with high volume. If we get that move, then AA will set up to re-test or possibly take out its next major support levels at 13 to $12.50 a share, or even its 200-day moving average of $11.40 a share.

MSC Industrial Direct

Another earnings short-squeeze prospect is MSC Industrial Direct (MSM), which is set to release numbers on Wednesday before the market open. Wall Street analysts, on average, expect MSC Industrial Direct to report revenue of $727.26 million on earnings of $1.06 per share.

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The current short interest as a percentage of the float for MSC Industrial Direct is notable at 8%. That means that out of the 51.03 million shares in the tradable float, 4.02 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 the bulls get the earnings news they're looking for.

From a technical perspective, MSM is currently trending above both its 50-day and 200-day moving averages, which is bullish. This stock has been uptrending over the last six months, with shares moving higher from its low of $78.64 to its recent high of $96.28 a share. During that uptrend, shares of MSM have been consistently making higher lows and higher highs, which is bullish technical price action. That move now has MSM trending within range of triggering a near-term breakout trade post-earnings.

If you're bullish on MSM, 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 $95 to its 52-week high of $96.62 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 366,142 shares. If that breakout triggers post-earnings, then MSM will set up to enter new 52-week-high territory, which is bullish technical price action. Some possible upside targets off that breakout are $110 to $120 a share.

I would simply avoid MSM 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 $91.95 a share to some more near-term support at $91 a share with high volume. If we get that move post-earnings, then MSM will set up to re-test or possibly take out its next major support levels at $87 to its 200-day moving average of $84.22 a share.

Barracuda

My final earnings short-squeeze play security and storage solutions player Barracuda Networks (CUDA), which is set to release numbers on Thursday after the market close. Wall Street analysts, on average, expect Barracuda Networks to report revenue of $64.38 million on earnings of 3 cents per share.

The current short interest as a percentage of the float for Barracuda Networks is pretty high at 10.5%. That means that out of the 6.75 million shares in the tradable float, 725,000 shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 0.4%, or by about 3,000 shares. If the bears get caught pressing their bets into a bullish quarter, then shares of CUDA could easily rip sharply higher post-earnings as the shorts rush to cover some of their trades.

From a technical perspective, CUDA is currently trending above its 50-day moving average, which is bullish. This stock has been uptrending over the last month, with shares moving higher from its low of $26.91 to its recent high of $33.98 a share. During that uptrend, shares of CUDA have been consistently making higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of CUDA within range of triggering a major breakout trade post-earnings.

If you're in the bull camp on CUDA, 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 $33.98 to $36.46 a share with high volume. Look for volume on that move that hits near or above its three-month average volume of 172,374 shares. If that breakout triggers post-earnings, then CUDA will set up to re-test or possibly take out its all-time high of $44.40 a share.

I would avoid CUDA 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 $30 to its 50-day moving average of $28.68 a share with high volume. If we get that move, then CUDA will set up to re-test or possibly take out its next major support levels at $26.91 to $23.53 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.