One heavily shorted stock that's been beaten down big during the recent market malaise is Blue Nile ( NILE), which with its subsidiaries operates as an online retailer of diamonds and fine jewelry worldwide. In the past three months, this stock has dropped over 16%, and so far in 2011, it's down over 24%. Blue Nile has a market cap of $630 million and an enterprise value of $568 million. The stock isn't cheap, trading at 45 times trailing earnings and 34 times forward earnings. Blue Nile is cash-rich, with $79 million in cash on its balance sheet and very little debt. One of the biggest reasons that I love Blue Nile as a heavily shorted rebound play is that one of the greatest traders in the world recently accumulated a big stake in the stock. Steven Cohen's SAC Capital hedge fund disclosed on May 12 a 6.7% stake in NILE, or a position of 981,348 shares. Cohen is a master of getting in early on stocks that have the potential for large short squeezes. He did just that not so long ago in OpenTable ( OPEN) and Netflix ( NFLX) before both of those stocks ripped the heads of the short-sellers. From a technical standpoint, shares of Blue Nile have dropped big recently from $59 to a low of $43.30 a share. I now want to watch for the stock to find some buying support between $43 and its double-bottom support zone at around $41 a share. These are the levels I am watching for this stock to possible form a bottom and end its downtrend. If the stock were to break below $40.70, I would take off of my short squeeze radar for now. Blue Nile, one of TheStreet Ratings' top-rated Internet catalog and retail stocks, is a favorite target of the short-sellers. The current short interest as a percentage of the float for NILE is an extremlet5y large 35%. This stock doesn't have a big float either, with only 14.44 million shares available for trading. If you see NILE end its downtrend around those prices I mentioned, then look to get in with Cohen and ride the short squeeze higher. >>Practice your stock trading strategies and win cash in our stock game.