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.
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.
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BlackBerry
My first earnings short-squeeze trade idea is wireless communications solutions provider BlackBerry (BBRY), which is set to release numbers on Friday before the market open. Wall Street analysts, on average, expect BlackBerry to report revenue of $945.56 million on a loss of 16 cents per share.
Just recently, Morgan Stanley analyst James Faucette said he expects BlackBerry to report an in-line quarter that demonstrates financial and operational stabilization ahead of key releases in the coming quarter. He currently has an equal weight rating on the stock with no price target.
The current short interest as a percentage of the float for BlackBerry is very high at 18.5%. That means that out of the 479.46 million shares in the tradable float, 89.11 million shares are sold short by the bears. If this company can produce the earnings results the bulls are looking for, then shares of BBRY could easily spike sharply higher post-earnings as the bears rush to cover some of their positions.
From a technical perspective, BBRY is currently trending above both its 50-day and 200-day moving averages, which is bullish. This stock has been uptrending over the last two months, with shares moving higher from its low of $8.71 to its recent high of $11.17 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 big breakout trade post-earnings.
If you're bullish 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 near-term overhead resistance levels at $11.17 to its 52-week high at $11.65 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 13.96 million shares. If that breakout gets underway post-earnings, then BBRY will set up to enter new 52-week-high territory, which is bullish technical price action. Some possible upside targets off that move are $13 to $14 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 some key near-term support levels at $10.11 a share to its 50-day moving average of $10.09 a share with high volume. If we get that move, then BBRY will set up to re-test or possibly take out its next major support levels at its 200-day moving average of $8.92 to $8.71 a share, or even $8 a share.
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Diamond Foods
Another potential earnings short-squeeze play is packaged food player Diamond Foods (DMND), which is set to release its numbers on Thursday after the market close. Wall Street analysts, on average, expect Diamond Foods to report revenue $208.41 million on earnings of 15 cents per share.
The current short interest as a percentage of the float for Diamond Foods is very high at 14.3%. That means that out of the 26.15 million shares in the tradable float, 3.75 million shares are sold short by the bears. Any bullish earnings results from Diamond Foods that the market likes could spark a sharp short-covering rally for this stock post-earnings.
From a technical perspective, DMND is currently trending below both its 50-day and 200-day moving averages, which is bearish. This stock has been trending sideways for the last three months, with shares moving between $25.13 on the downside and $29.49 on the upside. Any high-volume move above the upper-end of its recent sideways trading chart pattern post-earnings could produce a big breakout trade for shares of DMND.
If you're in the bull camp on DMND, 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 $27.36 to its 200-day moving average at $28.58 a share and then more resistance at $29.20 to $29.49 a share with high volume. Look for volume on that move that hits near or above its three-month average volume of 267,505 shares. If that breakout triggers post-earnings, then DMND will set up to re-test or possibly take out its next major overhead resistance levels at $32 to $33.55 a share, or even $35 a share.
I would simply avoid DMND 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 $25.13 a share with high volume. If we get that move, then DMND will set up to re-test or possibly take out its next major support levels at $23.17 to its 52-week low at $20.22 a share.
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Micron Technology
Another potential earnings short-squeeze candidate is semiconductor solutions provider Micron Technology (MU), which is set to release numbers on Thursday after the market close. Wall Street analysts, on average, expect Micron Technology to report revenue of $4.15 billion on earnings of 80 cents per share.
The current short interest as a percentage of the float for Micron Technology is pretty high at 9.5%. That means that out of the 1.06 billion shares in the tradable float, 101.26 million shares are sold short by the bears. If Micron Technology can produce strong earnings results that the bulls love, then shares of MU could easily rip sharply higher post-earnings as the shorts rush to cover some of their bets.
From a technical perspective, MU is currently trending above its 200-day moving average and just below its 50-day moving average, which is neutral trendwise. This stock has started to form a major bottoming chart pattern over the last month and change, with shares of MU finding buying interest each time it has pulled back to just under $30 a share. That being said, shares of MU have also been making lower highs and over the last month, which is bearish technical price action.
If you're bullish on MU, 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 $32.12 a share to more near-term overhead resistance at $32.55 a share with high volume. Look for volume on that move that registers near or above its three-month average action of 24.61 million shares. If that breakout kicks off post-earnings, then MU will set up to re-test or possibly take out its next major overhead resistance levels at $33.41 to $33.70, or even $34.28 a share. Any high-volume move above those levels will then give MU a chance to take out its 52-week high of $34.85 a share.
I would avoid MU 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 $29.73 to $29.38 a share with high volume. If we get that move, then MU will set up to re-test or possibly take out its next major support level at its 200-day moving average of $27.25 a share.
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Scholastic
Another earnings short-squeeze prospect is global children's book publishing, education and media player Scholastic (SCHL), which is set to release numbers on Thursday before the market open. Wall Street analysts, on average, expect Scholastic to report revenue of $285 million on a loss of 84 cents per share.
The current short interest as a percentage of the float for Scholastic is pretty high at 11.9%. That means that out of the 27.86 million shares in the tradable float, 3.32 million shares are sold short by the bears. This stock currently sports a high short interest with a very low tradable float. Any bullish earnings news could easily set off a large short-squeeze post-earnings that sends the bears scrambling to cover some of their short positions in SCHL.
From a technical perspective, SCHL is currently trending below its 50-day moving average and just above its 200-day moving average, which is neutral trendwise. This stock has been downtrending over the last month and change, with shares moving lower from its high of $36.71 to its intraday low of $33.72 a share. During that downtrend, shares of SCHL have been consistently making lower highs and lower lows, which is bearish technical price action. That said, shares of SCHL are now trading very close to a key support level at its 200-day moving average of $33.33 a share.
If you're bullish on SCHL, then I would wait until after its report and look for long-biased trades if this stock manages to break out back above its 50-day moving average of $34.96 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 129,606 shares. If that breakout develops post-earnings, then SCHL will set up to re-test or possibly take out its next major overhead resistance level at its 52-week high of $36.87 a share. Any high-volume move above that level will then give SCHL a chance to tag or take out $40 a share.
I would simply avoid SCHL 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 $33.33 a share to more key support at $32.50 a share with high volume. If we get that move, then SCHL will set up to re-test or possibly take out its next major support levels at $31 to $30.45 a share, or even $29 to $28 a share.
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Jabil Circuit
My final earnings short-squeeze play is electronic manufacturing services and solutions provider Jabil Circuit (JBL), which is set to release numbers on Wednesday after the market close. Wall Street analysts, on average, expect Jabil Circuit to report revenue of $3.83 billion on earnings of 2 cents per share.
The current short interest as a percentage of the float for Jabil Circuit sits at 2.5%. That means that out of the 182.67 million shares in the tradable float, 4.69 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 16.7%, or by 671,000 shares. If the bears get caught pressing their bets into a bullish quarter, then shares of JBL could easily rip sharply higher post-earnings as the shorts rush to cover some of their trades.
From a technical perspective, JBL 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 $16.92 to its recent high of $21.87 a share. During that uptrend, shares of JBL have been making mostly higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of JBL within range of triggering a big breakout trade post-earnings.
If you're in the bull camp on JBL, 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 $21.87 a share with high volume. Look for volume on that move that registers near or above its three-month average action of 1.60 million shares. If that breakout develops post-earnings, then JBL will set up to re-test or possibly take out its next major overhead resistance levels at $23.92 a share to its 52-week high at $24.13 a share. Any high-volume move above those levels will then give JBL a chance to tag or take out $26 to $27 a share.
I would avoid JBL or look for short-biased trades if after earnings it fails to trigger that breakout, and then drops back below both its 50-day moving average of $20.91 a share to $20 a share with high volume. If we get that move, then JBL will set up to re-test or possibly take out its next major support levels at its 200-day moving average of $18.94 to $17 a share.
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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.