Stock Quotes in this Article: FIO, ILMN, RCII, STX, SLCA

WINDERMERE, Fla. (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.

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.

>>5 Stocks Setting Up to Break Out

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 This Week

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.

>>5 Stocks Under $10 Poised to Pop

Illumina

My first earnings short-squeeze trade idea is life sciences tools and integrated systems developer Illumina (ILMN), which is set to release numbers on Monday after the market close. Wall Street analysts, on average, expect Illumina to report revenue of $305.44 million on earnings of 41 cents per share.

If you’re looking for a heavily-shorted stock that’s uptrending decently heading into its quarterly earnings report, then make sure to check out shares of Illumina. This stock has been pretty hot during the last six months, with shares up 21%.

The current short interest as a percentage of the float for Illumina is very high at 23.4%. That means that out of the 123.38 million shares in the tradable float, 28.40 million shares are sold short by the bears. If the bulls get the earnings news they’re looking for, then this stock could rip higher due to short-covering post-earnings.

From a technical perspective, ILMN is currently trending above its 200-day moving average and just below its 50-day moving average, which is neutral trendwise. This stock has sold off during the last two months from its high of $57 to its recent low of $49.16 a share. Despite that selloff, shares of ILMN are still trending above its 200-day moving average and within range of triggering a near-term breakout trade post-earnings.

If you’re bullish on ILMN, 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 its 50-day moving average of $52.39 a share and then above more resistance at $54.10 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 1,601,830 shares. If that breakout hits, then ILMN will set up to re-test or possibly take out its next major overhead resistance level at $57 a share. Any move above $57 will then push shares of ILMN into new 52-week-high territory, which is bullish technical price action. Some possible upside targets off that move are $60 to $65 a share.

I would simply avoid ILMN 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 $50.20 to $49.16 a share with heavy volume. If we get that move, then ILMN will set up to re-test or possibly take out its next major support levels at $47.68 to its 200-day moving average of $46.28 a share.

U.S. Silica

Another potential earnings short-squeeze trade play is domestic producer of commercial silica U.S. Silica (SLCA), which is set to release its numbers on Wednesday after the market close. Wall Street analysts, on average, expect U.S. Silica to report revenue of $108.73 million on earnings of 32 cents per share.

If you’re looking for a heavily-shorted stock that’s trending strong heading into its quarterly report, then make sure to check out shares of U.S. Silica. This stock has been on fire during the last six months, with shares exploding higher by 104%.

The current short interest as a percentage of the float for U.S. Silica is extremely high at 43.9%. That means that out of the 11.57 million shares in the tradable float, 5.49 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 3.6%, or by about 191,000 shares. If the bears are caught pushing their luck too strong into a solid quarter, then we could easily see a monster short-squeeze develop for shares of SLCA post-earnings.

From a technical perspective, SLCA 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 soaring from its low of $9.27 to its recent high of $20.30 a share. During that uptrend, shares of SLCA have been consistently making higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of SLCA within range of triggering a major breakout trade post-earnings.

If you’re in the bull camp on SLCA, 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 $20.30 a share with high volume. Look for volume on that move that registers near or above its three-month average action of 501,518 shares. If that breakout hits, then SLCA will set up to re-test or possibly take out its all-time high at $22.14 a share. If that level gets taken out with volume, then SLCA could hit $25 to $28 a share post-earnings.

I would simply avoid SLCA 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 $19 to $17.71 a share with high volume. If we get that move, then SLCA will set up to re-test or possibly take out its 50-day moving average of $16.55 a share.

Seagate Technology

One potential earnings short-squeeze candidate is provider of electronic data storage products Seagate Technology (STX), which is set to release numbers on Monday after the market close. Wall Street analysts, on average, expect Seagate Technology to report revenue of $3.58 billion on earnings of $1.28 per share.

This company is hoping to snap its streak of missing Wall Street estimates in the past two quarters. During the last quarter, Seagate Technology missed Wall Street estimates after it reported a net income of $1.45 per share versus estimates of $1.69 per share. In the quarter prior to that, it missed estimates by 10 cents per share.

The current short interest as a percentage of the float for Seagate Technology is pretty high at 12.7%. That means that out of the 328.31 million shares in the tradable float, 41.74 million shares are sold short by the bears.

From a technical perspective, STX is currently trending well above both its 50-day and 200-day moving averages, which is bullish. This stock has been on fire during the last two months, with shares soaring from its low of $24.90 to its recent high of $37.94 a share. During that uptrend, shares of STX have been consistently making higher lows and higher highs, which is bullish technical price action. That move has pushed shares of STX within range of triggering a near-term 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 recent high of $37.94 a share, or if it takes out its intraday high today if that’s greater than $37.94 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 9 million shares. If that breakout hits, 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 $40 to $45 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 $36 to $35 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 $33 to $32 a share. Any move below $32 will then put its 50-day moving average of $30.25 into range for shares of STX.

Fusion-IO

Another earnings short-squeeze play is datacenter solutions provider Fusion-IO (FIO), which is set to release numbers on Wednesday after the market close. Wall Street analysts, on average, expect Fusion-IO to report revenue of $120.31 million on earnings of 8 cents per share.

During the last quarter, this company reported revenue of $118.1 million and its GAAP reported sales were 59% higher than the prior-year quarter’s $74.4 million. This stock is trending poorly ahead of the quarter, since shares are off by 14.2% during the last three months.

The current short interest as a percentage of the float for Fusion-IO is very high at 32.30%. That means that out of the 77.29 million shares in the tradable float, 20.76 million shares are sold short by the bears. If Fusion-IO can deliver the earnings news the bulls are looking for, then this stock could explode higher since its beaten-down and so heavily-shorted.

From a technical perspective, FIO is currently trending below both its 50-day and 200-day moving averages, which is bearish. This stock has been downtrending badly for the last four months, with shares falling from its high of $32.63 to its recent low of $18.85 a share. During that plunge, shares of FIO have been mostly making lower highs and lower lows, which is bearish technical price action. That said, shares of FIO have just started to rebound off that $18.85 low and move within range of triggering a near-term breakout trade.

If you’re bullish on FIO, 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 $21.52 to its 50-day moving average at $22.32 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 2.9 million shares. If that breakout triggers, then FIO will set up to re-test or possibly take out its next major overhead resistance levels at its 200-day moving average of $23.77 to $25 a share. Any high-volume move above $25 will then put $28 to $30 into focus for shares of FIO.

I would avoid FIO 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 $19.85 to $18.85 a share with heavy volume. If we get that move, then FIO will set up to re-test or possibly take out its 52-week low of $17.45 a share. Any move below $17.45 will then push FIO into new 52-week low territory, which is bearish technical price action.

Rent-A-Center

My final earnings short-squeeze trade idea is rent-to-own operator in North America Rent-A-Center (RCII), which is set to release numbers on Monday after the market close. Wall Street analysts, on average, expect Rent-A-Center to report revenue of $777.51 million on earnings of 83 cents per share.

During the last quarter, this company reported net income of 67 cents per share versus Wall Street estimates of 67 cents per share. This comes after two consecutive quarters where Rent-A-Center topped Wall Street estimates.

The current short interest as a percentage of the float for Rent-A-Center stands is pretty high at 10.8%. That means that out of the 57.09 million shares in the tradable float, 6.21 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 14.9%, or by about 805,000 shares. If the short-sellers are caught leaning too hard into a bullish quarter, then shares of RCII could skyrocket post-earnings.

From a technical perspective, RCII is currently trending above both its 50-day and 200-day moving averages, which is bullish. This stock has been uptrending decent for the last month, with shares trading up from its low of $32.93 to its recent high of $35.55 a share. During that move, shares of RCII have been consistently making higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of RCII within range of triggering a near-term breakout trade.

If you’re in the bull camp on RCII, 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 $35.55 to $36.50 a share with high volume. Look for volume on that move that registers near or above its three-month average action of 421,338 shares. If that breakout hits, then RCII will set up to re-test or possibly take out its next major overhead resistance level at $37.41 to $38 a share. Any high-volume move above $38 will then put $40 or higher into range for shares of RCII.

I would avoid RCII or look for short-biased trades if after earnings it fails to trigger that breakout, and then drops back below today’s low of $34.37 a share with high volume. If we get that move, then RCII will set up to re-test or possibly take out its next major support levels at $32.93 to $32.45 a share. Any move below $32.45 will then put $31 into range for shares of RCII.

To see more potential earnings short squeeze plays, check out the Earnings Short Squeeze Plays portfolio on Stockpickr.

-- Written by Roberto Pedone in Winderemere, Fla.


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 Windermere, Fla., 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.