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One potential earnings short-squeeze trade in the computer storage sector is Xyratex ( XRTX), which is set to report results on Thursday after the market close. This company provides modular solutions for the enterprise data storage industry and hard disk drive capital equipment for the HDD industry. Street analysts, on average, expect Xyratex to report revenue of $316.51 million on earnings of 26 cents per share.

Stifel Nicolaus recently cut its rating on this stock to hold from buy, citing that the stock has a more balanced risk/reward after a 25% rally year-to-date, and an 80% move since early October. Despite that recent downgrade, this stock is trending very strong and trading just one point off its 52-week high of $17.52 a share.

The current short interest as a percentage of the float for Xyratex sits at 4.4%. That means that out of the 26.76 million shares in the tradable float, 1.19 million are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 11.3%, or by about 121,000 shares. This isn't a huge short interest, but it's more than enough to spark a decent short-covering rally if the company can report strong earnings and bullish guidance.

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From a technical perspective, XRTX is currently trading above both its 50-day and 200-day moving averages, which is bullish. This stock has soared from its October low of $9.01 to a recent high of $17.52 a share. During that move, XRTX has consistently made higher lows and higher highs, which is bullish price action. Now the stock is trading within range of triggering a big breakout trade post-earnings.

If you're bullish on XRTX, I would wait until after its report and look for long biased trades if the stock breaks out above some overhead resistance at $17.52 to $17.68 a share with high-volume. Look for volume on a move over those levels that are near or well above its three-month average volume of 266,334 shares. If we get that action, then look for XRTX to tag $20 or higher if the bulls gain full control of this stock post-earnings.

I would simply avoid XRTX or look for short biased trades if after earnings that breakout never triggers and the stock drops back below its 50-day at $16.55 a share, and then below some near-term support at $15.95 with high-volume. If we get that move, then look for XRTX to drop pretty big sine the next nearest support level is near $14.50 to $13 a share.

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