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. 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 timeframe that your profits add up quickly. >>5 Stocks Under $10 Set to Soar 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. That's why it can be worth betting prior to the report -- but only if you have a very strong conviction that the stock is going to rip higher, and its acting technically very bullish. Remember, even when you have that conviction and you have done your due diligence, the stock can still get hammered if the street doesn't like the numbers or guidance. >>ACTIVE STOCK TRADERS: Check out Stockpickr's special offer for Real Money, headlined by Jim Cramer, now! 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, and then jump in and trade the prevailing trend on a heavily shorted stock that's reporting its numbers. With that in mind, here's a look at several stocks that could experience big short squeezes when they report earnings this week.
OCZ Technology Group
Helen of Troy
Wolverine World WideMy final earnings short-squeeze trade idea today is footwear player Wolverine World Wide ( WWW), which is set to release numbers on Tuesday before the market open. This company is a designer, manufacturer and marketer of a range of casual footwear and apparel, performance outdoor footwear and apparel, industrial work shoes, boots and apparel, and uniform shoes and boots. Wall Street analysts, on average, expect Wolverine World Wide to report revenue of $314.46 million on earnings of 44 cents per share. This company has met or topped Wall Street estimates during the last four quarters. During the last quarter, it reported earnings per share of 64 cents, which beat Wall Street estimates of 55 cents per share. The current short interest as a percentage of the float for Wolverine World Wide is pretty high at 7.1%. That means that out of the 47.16 million shares in the tradable float, 3.35 million are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 19.1%, or by about 536,000 shares. If the bears are caught pressing too hard into this quarter, then we could easily see a sizeable short-squeeze develop post-earnings. From a technical perspective, WWW is currently trading above its 200-day moving average and below its 50-day moving average, which is neutral trendwise. This stock was hit hard during the last two months, with shares dropping from $43.99 to $36.85 a share. During that move lower, shares of WWW were making lower highs and lower lows, which is bearish technical price action. That said, after hitting $36.85 a share, the stock has started to trend sideways between $36.85 and $39.32 a share. A move outside of that sideways pattern should setup the next major trend for WWW. If you're bullish on WWW, then I would wait until after its report and look for long-biased trades if it can manage to trigger a break out above some near-term overhead resistance at $39.32, and then above its 50-day moving average of $40.35 a share with high-volume. Look for volume on that move that registers near or above its three-month average action of 994,077 shares. If we get that action, then WWW has a great chance of re-testing and possibly taking out its recent resistance zone near $42.60 to $43.99 a share. I would simply avoid WWW or look for short-biased trades if it fails to trigger that breakout, and then moves back below some major near-term support at $36.85 a share with high-volume. If we get that move, then WWW could drop pretty sharply towards its next significant support levels at $35 to $33.89 a share, or possibly even lower if the bears whack this stock post-earnings. 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.
Twitter and become a fan on Facebook.