5 Hated Stocks Set to Soar on Earnings

Merge Healthcare

Another potential earnings short-squeeze play is technology player Merge Healthcare (MRGE), which is set to release its numbers on Wednesday before the market open. This company develops software solutions that facilitate the sharing of images to create an electronic healthcare experience for patients and physicians. Wall Street analysts, on average, expect Merge Healthcare to report revenue of $60.60 million on earnings of 1 cent per share.

If you're looking for a beaten-down and heavily-shorted small-cap stock ahead of its earnings report this week, then make sure to check out shares of Merge Healthcare. This stock has been annihilated by the sellers, with shares off by over 35% so far in 2012, and down over 42% in the last six months.

The current short interest as a percentage of the float for Merge Healthcare is rather high at 11.1%. That means that out of the 58.06 million shares in the tradable float, 6.48 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 4.5%, or by about 276,000 shares. If the bears are caught leaning too hard into this quarter, then we could easily see a sharp short-covering rally develop post-earnings.

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From a technical perspective, MRGE is currently trading above its 50-day moving average and below its 200-day moving average, which is neutral trendwise. This stock has been hammered by the bears during the last six months, with shares dropping from over $6.50 to a recent low of $2.20 a share. During that large move lower, shares of MRGE have been consistently making lower highs and lower lows, which is bearish technical price action. That said, the stock has started to find support near its 50-day and its now setting up for a breakout trade post-earnings.

If you're in the bull camp on MRGE, then I would wait until after it reports earnings and look for long-biased trades if this stock breaks out above some near-term overhead resistance at $3.11 to $3.37 a share with high volume. Look for volume on that move that registers near or above its three-month average action of 804,784 shares. If we get that move, then MRGE will have a great chance of hitting $4 to $4.70 a share post-earnings.

I would simply avoid MRGE or look for short-biased trades if after earnings this stock fails to trigger that breakout and then takes out its 50-day moving average of $2.69 a share with heavy volume. If we get that action, then MRGE will setup to trade back towards some major near-term support zones at $2.30 to $2.20 a share.

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