Stock Quotes in this Article: CHE, CLF, HERO, JNS, VMW

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 Wall 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.

Cliffs Natural Resources

My first earnings short-squeeze trade idea is mining and natural resources player Cliffs Natural Resources (CLF), which is set to release numbers on Thursday before the market open. Wall Street analysts, on average, expect Cliffs Natural Resources to report revenue of $1.19 billion on a loss of 5 cents per share.

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The current short interest as a percentage of the float for Cliffs Natural Resources is extremely high at 33%. That means that out of the 144.69 million shares in the tradable float, 53.13 million shares are sold short by the bears. If the bulls get the earnings news they're looking for, then shares of Cliffs Natural Resources could easily explode sharply higher post-earnings as the bears rush to cover some of their bets.

From a technical perspective, CLF is currently trending below both its 50-day and 200-day moving averages, which is bearish. This stock has been uptrending a bit over the last month and change, with shares moving higher from its low of $13.60 to its recent high of $16.50 a share. During that move, shares of CLF have been making mostly higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of CLF within range of triggering a big breakout trade post-earnings above some key overhead resistance levels.

If you're bullish on CLF, 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 $16 to $16.50 a share and then above more resistance at $16.63 a share with high volume. Look for volume on that move that hits near or above its three-month average volume of 5.10 million shares. If that breakout hits post-earnings, then CLF will set up to re-test or possibly take out its next major overhead resistance levels at $17.96 to $19 a share, or even its 200-day moving average of $20.12 to $22 a share.

I would simply avoid CLF 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 $14.95 to $14.45 a share high volume. If we get that move, then CLF will set up to re-test or possibly take out its 52-week low of $13.60 a share. Any move below $13.60 would then push shares of CLF into new 52-week-low territory, which is bearish technical price action.

Chemed

Another potential earnings short-squeeze play is hospice and palliative care provider Chemed (CHE), which is set to release its numbers on Wednesday after the market close. Wall Street analysts, on average, expect Chemed to report revenue $363.73 million on earnings of $1.47 per share.

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The current short interest as a percentage of the float for Chemed is extremely high at 33%. That means that out of the 16.95 million shares in the tradable float, 6 million shares are sold short by the bears. This is an enormous short interest on a stock with a very low tradable float. If the bulls get the earnings news they're looking for, then shares of CHE could easily rip sharply higher post-earnings as the bears rush to cover some of their trades.

From a technical perspective, CHE 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, with shares moving higher from its low of $80.76 to its recent high of $98 a share. During that uptrend, shares of CHE have been consistently making higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of CHE within range of triggering a major breakout trade post-earnings.

If you're in the bull camp on CHE, 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 $98 a share (or above Wednesday'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 200,398 shares. If that breakout kicks off post-earnings, then CHE will set up to enter new 52-week-high territory, which is bullish technical price action. Some possible upside targets off that breakout are $120 to $130 a share.

I would simply avoid CHE 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 at $94 a share with high volume. If we get that move, then CHE will set up to re-test or possibly take out its next major support levels at its 50-day moving average of $91.42 to $88 a share, or even $84 a share.

VMware

Another potential earnings short-squeeze candidate is virtualization infrastructure solutions provider VMware (VMW), which is set to release numbers on Tuesday after the market close. Wall Street analysts, on average, expect VMware to report revenue of $1.44 billion on earnings of 79 cents per share.

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Just recently, Wells Fargo downgraded shares of VMware to market perform saying it will be difficult for the company to sustain mid-teens growth in 2015. Wells lowered its price target range for the stock to $98 to $105 from $107 to $117.

The current short interest as a percentage of the float for VMware is extremely high at 21%. That means that out of the 80.24 million shares in the tradable float, 16.75 million shares are sold short by the bears. If this company can deliver the earnings news the bulls are looking for, then shares of VMware could easily soar sharply higher post-earnings as the bears jump to cover some of their positions.

From a technical perspective, VMW is currently trending above its 50-day and its 200-day moving averages, which is bullish. This stock has been trending sideways and basing for the last two months, with shares moving between around $92 on the downside and $99.13 on the upside. Any high-volume move above the upper-end of its recent sideways trading chart pattern post-earnings could easily trigger a major breakout trade for shares of VMW.

If you're bullish on VMW, 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 $99.13 to $99.14 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 1.49 million shares. If that breakout begins post-earnings, then VMW will set up to re-fill some of its previous gap-down-day zone from April that started at $107.32 a share. If that gap gets filled with volume, the VMW will set up to re-test or possibly take out its 52-week high of $112.89 a share.

I would avoid VMW or look for short-biased trades if after earnings it fails to trigger that breakout and then takes out its 200-day moving average of $92.90 to more near-term support at $92.69 a share with high volume. If we get that move, then VMW will set up to re-test or possibly take out its next major support levels at $88.64 to $86.88 a share. Any high-volume move below those levels will then give VMW a chance to tag $80 a share.

Hercules Offshore

Another earnings short-squeeze prospect is oil and gas drilling exploration player Hercules Offshore (HERO), which is set to release numbers on Wednesday before the market open. Wall Street analysts, on average, expect Hercules Offshore to report revenue of $243.40 million on earnings of 1 cent per share.

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The current short interest as a percentage of the float for Hercules Offshore is pretty high at 11.8%. That means that out of the 155.41 million shares in the tradable float, 15.04 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 15%, or by around 2.37 million shares. If the bears get caught pressing their bets into a bullish quarter, then shares of HERO could easily surge sharply higher post-earnings as the bears rush to cover some of their positions.

From a technical perspective, HERO is currently trending below its 50-day and is 200-day moving averages, which is bearish. This stock has been basing and consolidating for the last month, with shares moving between $3.90 on the downside and $4.28 on the upside. Any high-volume move above the upper-end of its recent sideways trading chart pattern post-earnings could easily trigger a big breakout trade for shares of HERO.

If you're bullish on HERO, 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 $4.15 to $4.28 a share and then above its 50-day moving average of $4.36 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 4.98 million shares. If that breakout gets underway post-earnings, then HERO will set up to re-test or possibly take out its next major overhead resistance levels at around $4.70 to $5 a share, or even its 200-day moving average of $5.29 a share.

I would simply avoid HERO or look for short-biased trades if after earnings it fails to trigger that breakout and then takes out its 52-week low of $3.90 a share with high volume. If we get that move, then HERO will set up to enter new 52-week-low territory, which is bearish technical price action. Some possible downside targets off that move are $3.50 to $3 a share, or even below $3 a share.

Janus Capital Group

My final earnings short-squeeze trade idea is asset management player Janus Capital Group (JNS), which is set to release numbers on Wednesday before the market open. Wall Street analysts, on average, expect Janus Capital Group to report revenue of $235.49 million on earnings of 18 cents per share.

The current short interest as a percentage of the float for Janus Capital Group is very high at 15%. That means that out of the 181.28 million shares in the tradable float, 27.30 million shares are sold short by the bears. If this company can deliver the earnings news the bulls are looking for, then shares of JNS could easily rip sharply higher post-earnings as the bears rush to cover some of their bets.

From a technical perspective, JNS 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 $10.06 to its recent high of $12.93 a share. During that uptrend, shares of JNS have been making mostly higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of JNS within range of triggering a big breakout trade post-earnings.

If you're in the bull camp on JNS, 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 $12.93 to its 52-week high of $13.10 a share with high volume. Look for volume on that move that hits near or above its three-month average volume of 2.39 million shares. If that breakout hits post-earnings, then JNS will set up to enter new 52-week-high territory, which is bullish technical price action. Some possible upside targets off that breakout are $17 to $20 a share.

I would avoid JNS 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 $12.13 a share with high volume. If we get that move, then JNS will set up to re-test or possibly take out its next major support levels at $11.68 to its 200-day moving average of $11.16 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.