Stock Quotes in this Article: ADS, AMD, ATHN, CPHD, STX

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.

>>5 Toxic Stocks You Need to Sell in July

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.

>>5 Rocket Stocks to Buy for Summer Gains

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.

AthenaHealth

My first earnings short-squeeze play is healthcare information services player AthenaHealth (ATHN), which is set to release numbers on Thursday after the market close. Wall Street analysts, on average, expect AthenaHealth to report revenue of $182.14 million on earnings of 22 cents per share.

>>4 Stocks Rising on Unusual Volume

The current short interest as a percentage of the float for AthenaHealth is extremely high at 25%. That means that out of the 37.24 million shares in the tradable float, 8.70 million shares are sold short by the bears. This is a large short interest on a stock with a relatively low tradable float. Any bullish earnings news could easily spark a big short-covering rally for shares of ATHN post-earnings.

From a technical perspective, ATHN is currently trending above its 50-day moving average and below its 200-day moving average, which is neutral trendwise. This stock has been trending sideways for the last month and change, with shares moving between $118 on the downside and $136.32 on the upside. Any high-volume move above the upper-end of its recent range post-earnings could easily spark a big breakout trade for shares of ATHN.

If you're bullish on ATHN, 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 $131.75 to $136.32 a share and then once it clears its 200-day moving average of $139.36 a share with high volume. Look for volume on that move that hits near or above its three-month average volume of 1 million shares. If that breakout hits post-earnings, then ATHN will set up to re-test or possibly take out its next major overhead resistance levels at $150 to $160, or even $170 a share.

I would simply avoid ATHN 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 $123.70 a share high volume. If we get that move, then ATHN will set up to re-test or possibly take out its next major support levels at $118 to $110 a share.

Cepheid

Another potential earnings short-squeeze trade idea is molecular diagnostics player Cepheid (CPHD), which is set to release its numbers on Thursday after the market close. Wall Street analysts, on average, expect Cepheid to report revenue of $115.47 million on a loss of 13 cents per share.

>>4 Big Stocks to Trade on M&A News

Just recently, Wedbush said the high number of Cepheid's Infinity placements in the fourth quarter of 2013 and first quarter of 2014 could boost the company's second-quarter results. The firm has a $58 per share price target and an outperform rating on the stock.

The current short interest as a percentage of the float for Cepheid is very high at 12.8%. That means that out of the 68.67 million shares in the tradable float, 8.70 million shares are sold short by the bears. If the bulls get the earnings news they're looking for, then shares of CPHD could easily rip sharply higher post-earnings as the bears race to cover some of their positions.

From a technical perspective, CPHD is currently trending above both its 50-day and 200-day moving averages, which is bullish. This stock has been uptrending for the last two months and change, with shares moving higher from its low of $40.15 to its intraday high of $50.46 a share. During that move, shares of CPHD have been consistently making higher lows and higher highs, which is bullish technical price action. This move has now pushed shares of CPHD within range of triggering a major breakout trade post-earnings.

If you're in the bull camp on CPHD, 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 $53 to $54.51 a share and then once it clears its 52-week high at $55.89 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 537,508 shares. If that breakout begins post-earnings, then CPHD will set up to enter new 52-week-high territory, which is bullish technical price action. Some possible upside targets off that breakout are $65 to $70 a share.

I would simply avoid CPHD 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 at $46.13 and its 50-day moving average at $45.37 a share with high volume. If we get that move, then CPHD will set up to re-test or possibly take out its next major support levels at $43 to $41, or even $40 a share.

Seagate Technology

Another potential earnings short-squeeze candidate is data storage device player Seagate Technology (STX), which is set to release numbers on Thursday after the market close. Wall Street analysts, on average, expect Seagate Technology to report revenue of $3.33 billion on earnings of $1.09 per share.

>>5 Stocks Ready for Breakouts

The current short interest as a percentage of the float for Seagate Technology is notable at 6%. That means that out of the 310.92 million shares in the tradable float, 19.67 million shares are sold short by the bears. If Seagate Technology can deliver the earnings news the bulls are looking for, then this stock could easily spike sharply higher post-earnings as the bears rush to cover some of their bets.

From a technical perspective, STX 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 two months and change, with shares moving higher from its low of $48.07 to its intraday high of $59.98 a share. During that uptrend, shares of STX have been consistently making higher lows and higher highs, which is bullish technical price action. This move has now pushed shares of STX within range of triggering a major breakout trade post-earnings.

If you're bullish on STX, 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 at $62.76 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 2.53 million shares. If that breakout starts post-earnings, then STX will set up to enter new 52-week-high territory, which is bullish technical price action. Some possible upside targets off that breakout are $70 to $75 a share.

I would avoid STX 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 $57 to $56 a share with high volume. If we get that move, then STX will set up to re-test or possibly take out its next major support levels at its 50-day moving average of $54.39 to its 200-day moving average of $51.84 a share.

For another take on STX, it was also featured recently in "5 Tech Stocks to Trade for Gains."

Alliance Data Systems

Another earnings short-squeeze prospect is business services provider Alliance Data Systems (ADS), which is set to release numbers on Thursday before the market open. Wall Street analysts, on average, expect Alliance Data Systems to report revenue of $1.25 billion on earnings of $2.73 per share.

>>5 Stocks Under $10 Set to Soar

The current short interest as a percentage of the float for Alliance Data Systems is pretty high at 10%. That means that out of the 52.69 million shares in the tradable float, 5.67 million shares are sold short by the bears. If the bulls get the earnings news they're looking for, then shares of ADS could easily rip sharply higher post-earnings as the bears jump to cover some of their positions.

From a technical perspective, ADS is currently trending above both its 50-day and 200-day moving averages, which is bullish. This stock has been uptrending very strong for the last two months and change, with shares moving higher from its low of $230.79 to its recent high of $286.70 a share. During that uptrend, shares of ADS have been consistently making higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of ADS within range of triggering a big breakout trade post-earnings.

If you're bullish on ADS, then I would wait until after its report and look for long-biased trades if this stock manages to break out above some key near-term overhead resistance levels at $285 to $286.70 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 771,558 shares. If that breakout hits post-earnings, then ADS will set up to re-test or possibly take out its next major overhead resistance level at its 52-week high at $300.49 a share.

I would simply avoid ADS or look for short-biased trades if after earnings it fails to trigger that breakout and then drops back below some near-term support at $270 a share with high volume. If we get that move, then ADS will set up to re-test or possibly take out its next major support levels at its 50-day moving average of $261.03 to its 200-day moving average of $254.71 a share. Any high-volume move below those levels will then give ADS a chance to tag its next major support levels at $245 to $240, or even $235 a share.

ADS was also featured as a short-squeeze play in "Love the Stocks Everyone Hates: 5 Short-Squeeze Stocks Ready to Pop."

Advanced Micro Devices

My final earnings short-squeeze play is semiconductor player Advanced Micro Devices (AMD), which is set to release numbers on Thursday after the market close. Wall Street analysts, on average, expect Advanced Micro Devices to report revenue of $1.44 billion on earnings of 2 cents per share.

The current short interest as a percentage of the float for Advanced Micro Devices is extremely high at 18%. That means that out of the 617.06 million shares in the tradable float, 103.81 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 2.5%, or by about 2.73 million shares. If the bears get caught pressing their bets into a bullish quarter, then shares of AMD could easily explode sharply higher post-earnings as the shorts rush to cover some of their trades.

From a technical perspective, AMD is currently trending above both its 50-day and 200-day moving averages, which is bullish. This stock recently broke out above some key near-term overhead resistance levels at $4.40 to $4.50 a share with heavy upside volume. That move is quickly pushing shares of AMD within range of triggering another major breakout trade post-earnings.

If you're in the bull camp on AMD, 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 at $4.65 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 22.85 million shares. If that breakout kicks off post-earnings, then AMD will set up to re-test or possibly take out its next major overhead resistance levels at $5.50 to $6, or even $6.50 a share.

I would avoid AMD 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 $4.40 to $4.30 a share with high volume. If we get that move, then AMD will set up to re-test or possibly take out its next major support levels at its 50-day moving average of $4.13 to its 200-day moving average of $3.84 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.


RELATED LINKS:







Follow Stockpickr on Twitter and become a fan on Facebook.

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.