WINDERMERE, Fla. (Stockpickr) -- Once again, we're seeking out stocks that look poised for an earnings short squeeze.
These stocks could make big moves to the upside if the bears are caught leaning the wrong way. Market bears short stocks for a lot of reasons, including poor fundamentals, overvaluation and poor technical chart patterns. But even the best short-seller can get caught short the wrong stock prior to a company's earnings report. If a stock is heavily shorted going into an earnings report and the company delivers bullish results, the stock is primed to explode to the upside.
On the flipside, if a stock is heavily shorted prior to an earnings report and the company fails to deliver strong results, then the bears will have an open season to knock a stock down substantially. It's a strategy that comes with a lot of risk but also has the potential for great reward. A short squeeze can be the start of a major trend that takes a stock higher for days and even weeks, which is why I love to look for earnings short-squeeze candidates because; when they do occur, market players can make some big money.
It's important when trading an earnings short squeeze candidate to always use a disciplined trading approach. If the short squeeze doesn't materialize, then it's best to just cut your losses and move on. But keep in mind that sometimes a stock won't start on its short-squeeze mission until a day or two following the earnings. It can take some time for big institutional investors to digest all of the results and start to place their trades.Related: 4 Stocks Setting Up to Break Out That's exactly what happened to Sina (SINA), which was one of my earnings short-squeeze picks last week. The stock initially fell after it reported their results, all the way down to $74.22 a share, and then it proceeded to start a short squeeze that took the stock back up to $84 in just two trading sessions. Before we take a look at some potential earnings short-squeeze candidates, let's go over the basics. A short squeeze is a rapid increase in the price of a stock that occurs when there is a lack of supply and an excess of demand for the stock. Short squeezes happen when bears who've sold the stock short are forced to cover their position on a stock as it rises. Short sellers will cover their positions to avoid losses further losses. Here's a look at a number of stocks that could experience a big short squeeze when they report earnings this week.
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