Blue Nile

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My first earnings short-squeeze play is specialty retailer Blue Nile ( NILE), which is set to release numbers on Thursday after the market close. This company is an online retailer of diamonds and fine jewelry. Wall Street analysts, on average, expect Blue Nile to report revenue of $88.99 million on earnings of 13 cents per share.

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This company topped Wall Street estimates last quarter after missing estimates in the prior two quarters. During the second quarter, Blue Nile reported a profit of 11 cents per share vs. Wall Street estimates of 7 cents per share. In the first quarter, the company missed Wall Street estimates by 5 cents per share. Heading into this report, net income for Blue Nile has dropped 50.6% on average over the last four quarters.

The current short interest as a percentage of the float for Blue Nile is very high at 26.6%. That means that out of the 11.48 million shares in the tradable float, 3.26 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 5.5%, or by 169,000 shares.

From a technical perspective, NILE is currently trading above its 200-day moving average and below its 50-day moving average, which is neutral trendwise. This stock has been trending sideways for the last two months, with shares moving between $36 on the downside and $41.74 on the upside. A move outside of that range post-earnings will likely set up the next major trend for NILE.

If you're bullish on NILE, then I would wait until after its report and look for long-biased trades once it manages to take out its 50-day at $38.62 a share, and then once it clears some more overhead resistance levels at $41.74 to $45 a share with high volume. Look for volume on that move that registers near or above its three-month average action of 251,218 shares. If we get that action, then look for NILE to hit $50 or higher post-earnings.

I would simply avoid NILE or look for short-biased trades if after earnings it fails to trigger to trend back above its 50-day, and then once it drops below some near-term support at $36.70 a share with heavy volume. If we get that move, then NILE will set up to re-test or possibly take out its 200-day moving average of $33.88 a share post-earnings.

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