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5 Heavily-Shorted Stocks About to Report

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.

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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.

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.

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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.

Repros Therapeutics

My first earnings short-squeeze candidate is Repros Therapeutics (RPRX), which is set to release numbers on Wednesday before the market open. This is development stage biopharmaceutical company focused on the development of oral small molecule drugs for major unmet medical needs in male and female health. Wall Street analysts, on average, expect Repros Therapeutics to report a loss of 24 cents per share.

The current short interest as a percentage of the float for Repros Therapeutics is very high at 17.4%. That means that out of the 10.99 million shares in the tradable float, 2.14 million shares are sold short by the bears. This is a high short interest low float situation. If Repros Therapeutics can deliver the earnings news the bulls are looking for, then this stock could short-squeeze big post-earnings.

From a technical perspective, RPRX is currently trading below its 50-day moving average and above its 200-day moving average, which is neutral trendwise. This stock has been downtrending during the last two months, with shares dropping from its high of $17 to its recent low of $12.75 a share. During that slide lower, shares of RPRX have been mostly making lower highs and lower low, which is bearish technical price action. That said, the stock has started to find some buying interest at $12.75 and it's quickly moving within range of triggering a near-term breakout trade post-earnings.

If you're bullish on RPRX, then I would wait until after its report and look for long-biased trades once it manages to break out above some near-term overhead resistance levels at $14.62 to $14.80 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 209,179 shares. If that breakout triggers, then RPRX will set up to re-test or possibly take out its 52-week high of $17 a share.

I would simply avoid RPRX or look for short-biased trades if after earnings it fails to trigger that breakout, and then moves back below some near-term support levels at $12.75 to $12 a share with high volume. If we get that action, then RPRX will set up to re-test or possibly take out its next major support levels at $12 to $10.27 a share.

Cyberonics

Another potential earnings short-squeeze play is Cyberonics (CYBX), which is set to release its numbers on Friday before the market open. This is a medical device company. It is engaged in the design, development, sales and marketing of implantable medical devices that provide a unique therapy for the treatment of refractory epilepsy and treatment-resistant depression. Wall Street analysts, on average, expect Cyberonics to report revenue of $59.93 million on earnings of 39 cents per share.

The current short interest as a percentage of the float for Cyberonics is notable at 5.8%. That means that out of the 24.18 million shares in the tradable float, 1.56 million shares are sold short by the bears. This isn't a huge short interest, but it's more than enough to spark a solid short-covering rally if Cyberonics can deliver bullish earnings news for the bulls.

From a technical perspective, CYBX is currently trading above its 200-day moving average and below its 50-day moving average, which is neutral trendwise. This stock has been downtrending for the last month, with shares falling from a high of $54 to a recent low of $43.69 a share. During that slide lower, shares of CYBX have been consistently making lower highs and lower lows, which is bearish technical price action. That said, the stock has now started to spike higher and at least temporarily break its short-term downtrending pattern.

If you're in the bull camp on CYBX, then I would wait until after its report and look for long-biased trades once this stock manages to break out above some near-term overhead resistance levels at $47.28 to its 50-day at $49.69 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 268,867 shares. If that breakout triggers, then CYBX could possibly re-test or take out its 52-week high of $54 a share.

I would simply avoid CYBX or look for short-biased trades if after earnings this stock fails to trigger that breakout, and then drops back below some near-term support levels at $43.69 to $42.53 a share with high volume. If we get that move, then look or CYBX to re-test or possibly take out its next major support levels at $40 to $37.11 a share.

Sears Holdings

One potential earnings short-squeeze trade is Sears Holdings (SHLD), which is set to release numbers on Thursday after the market close. This company is an integrated retailer with over 3,900 full-line and specialty retail stores in the United States and Canada. Wall Street analysts, on average, expect Sears Holdings to report revenue of $8.59 billion on a loss of $2.18 per share.

During the second quarter, this company narrowed its loss to $132 million from a loss of $146 million a year earlier, but missed Wall Street estimates. Revenue dropped 8.4% to $9.47 billion from $10.33 billion.

The current short interest as a percentage of the float for Sears Holdings is pretty high at 9.5%. That means that out of the 31.37 million shares in the tradable float, 7.49 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 6.4%, or by about 450,000 shares. If the bears are caught pressing their bets too hard into this quarter, then we could easily see a large short-squeeze develop post-earnings.

From a technical perspective, SHLD is currently trading above both its 50-day and 200-day moving averages, which is bullish. This stock has been uptrending pretty strong for the last three months, with shares soaring from a low of $42.26 to its recent high of $68.77 a share. During that uptrend, shares of SHLD have been consistently making higher lows and higher highs, which is bullish technical price action. That move has now pushed the stock within range of triggering a breakout trade post-earnings.

If you're bullish on SHLD, then I would wait until after its report and look for long-biased trades if it can manage to break out above some near-term overhead resistance at $63.71 a share with high volume. Look for volume on that move that registers near or above its three-month average action of 1,058,040 shares. If SHLD triggers that breakout, then this stock will set up to re-test or possibly take out its recent high of $68.77 a share.

I would avoid SHLD or look for short-biased trades if after earnings it fails to trigger that breakout, and then drops below some key near-term support levels at $60 to $56.03 a share with high volume. If we get that action, then SHLD will set up to re-test or possibly take out its 200-day at $52.66 a share.

Buckle

Another earnings short-squeeze candidate is the Buckle (BKE), which is set to release numbers on Thursday before the market open. This company is a retailer of medium to better-priced casual apparel, footwear, and accessories for fashion conscious young men and women. Wall Street analysts, on average, expect the Buckle to report revenue of $279.05 million on earnings of 84 cents per share.

This stock is uptrending very strong heading into its earnings report, with shares currently trading just two points off its 52-week high of $50 a share.

The current short interest as a percentage of the float for the Buckle is extremely high at 23.7%. That means that out of the 27.18 million shares in the tradable float, 6.59 million shares are sold short by the bears. If the bulls get the earnings news they're looking for, then this stock could easily see a large short-squeeze develop post-earnings.

From a technical perspective, BKE is currently trading above both its 50-day and 200-day moving averages, which is bullish. This stock has been uptrending very strong for the last three months, with shares soaring from a low of $36.64 to its recent high of $49.50 a share. During that uptrend, shares of BKE have been mostly making higher lows and higher highs, which is bullish technical price action. That move has now pushed BKE within range of triggering a major breakout trade post-earnings.

If you're bullish on BKE, then I would wait until after its report and look for long-biased trades if this stock can manage to break out above some near-term overhead resistance levels at $49.50 to $50 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 306,665 shares. If that breakout triggers, then look for BKE to trend up towards $55 to $60 a share, or possibly even higher post-earnings.

I would avoid BKE or look for short-biased trades if after earnings it fails to trigger that breakout, and then drops below some key near-term support levels at $46.02 to $45.44 a share with heavy volume. If we get that action, then BKE will set up to re-test or possibly take out its next major support levels at $43.28 to $42.98 a share.

Atwood Oceanics

My final earnings short-squeeze trade idea is Atwood Oceanics (ATW), which is set to release numbers on Thursday after the market close. This company is engaged in the international offshore drilling and completion of exploratory and developmental oil and gas wells and related support, management and consulting services. Wall Street analysts, on average, expect Atwood Oceanics to report revenue of $224.26 million on earnings of $1.22 per share.

This is another strong uptrending stock heading into its earnings report, with shares currently trading just two points off its 52-week high of $50.18 a share.

The current short interest as a percentage of the float for Atwood Oceanics is notable at 4.5%. That means that out of the 56.90 million shares in the tradable float, 2.58 million shares are sold short by the bears. This isn't a huge short interest, but it's more than enough to spark a solid short-covering rally if Atwood Oceanics can deliver the earnings news the bulls are looking for.

From a technical perspective, ATW is currently trading above both its 50-day and 200-day moving averages, which is bullish. This stock has been trending sideways for the last two months, with shares moving between $44.34 on the downside and $50.18 on the upside. Shares of ATW are starting to find some buying interest right at its 50-day moving average of $47.13 a share. That move is now pushing ATW within range of breaking out above the upper-end of its recent sideways trading pattern.

If you're in the bull camp on ATW, then I would wait until after its report and look for long-biased trades as long as this stock is trending above its 50-day at $47.13, and then once it breaks out above its 52-week high of $50.18 a share with high volume. Look for volume on that move that registers near or above its three-month average action of 457,094 shares. If we get that move, then look for ATW to trend up towards $55 to $60 a share, or possibly even higher post-earnings.

I would simply avoid ATW or look for short-biased trades if after earnings it fails to trigger that breakout, and then moves back below some key near-term support levels at $47.13 to $46.87 a share with heavy volume. If we get that move, then ATW will set up to re-test or possibly take out its next major support levels at $44.34 to $44.20 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 Winderemere, Fla.

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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.

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