5 Stocks Set to Soar on Bullish Earnings

DELAFIELD, Wis. (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 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 Wall Street doesn't like the numbers or guidance.

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.

YY

My first earnings short-squeeze trade idea is Chinese online social media platform player YY (YY), which is set to release numbers on Wednesday after the market close. Wall Street analysts, on average, expect YY to report revenue of $121.71 million on earnings of 58 cents per share.

The current short interest as a percentage of the float for YY is extremely high at 16.9%. That means that out of the 27.42 million shares in the tradable float, 4.63 million shares are sold short by the bears. This is a large short interest on a stock with a relatively low tradable float. Any bullish earnings news could easily spark a solid short-covering rally post-earnings that forces the bears to cover some of their bets.

From a technical perspective, YY is currently trending above both its 50-day and 200-day moving averages, which is bullish. This stock has been uptrending strong for the last three months, with shares moving higher from its low of $51.084 to its recent high of $81.84 a share. During that uptrend, shares of YY have been consistently making higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of YY within range of triggering a major breakout trade post-earnings.

If you're bullish on YY, then I would wait until after its report and look for long-biased trades if this stock manages to break out above some near-term overhead resistance levels at $81.84 to $82.54 a share and then above more resistance at $85.98 a share with high volume. Look for volume on that move that hits near or above its three-month average volume of 1.97 million shares. If that breakout triggers post-earnings, then YY will set up to re-test or possibly take out its all-time high at $90.93 a share. Any high-volume move above that level will then give YY a chance to tag and potentially trend well north of $100 a share.

I would simply avoid YY or look for short-biased trades if after earnings it fails to trigger that breakout and then drops back below some key near-term support at $74.21 a share with high volume. If we get that move, then YY will set up to re-test or possibly take out its next major support levels at its 50-day moving average of $71.77 to $67.50 a share, or even its 200-day moving average of $64.04 a share.

Zulily

Another potential earnings short-squeeze play is e-commerce player Zulily (ZU), which is set to release its numbers on Wednesday after the market close. Wall Street analysts, on average, expect Zulily to report revenue $272.04 million on earnings of 3 cents per share.

The current short interest as a percentage of the float for Zulily is extremely high at 48.2%. That means that out of the 18.05 million shares in the tradable float, 8.71 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 30.5%, or by about 2.03 million shares. If the bears get caught pressing their bets into a bullish quarter, then shares of ZU could easily explode sharply higher post-earnings as the shorts jump to cover some of their trades.

From a technical perspective, ZU is currently trending below its 50-day moving average, which is bearish. This stock has been consolidating and trending sideways for the last month, with shares moving between $33 on the downside and $37.88 on the upside. Any high-volume move above the upper-end of its recent range post-earnings could trigger a big breakout trade for shares of ZU.

If you're in the bull camp on ZU, then I would wait until after its report and look for long-biased trades if this stock manages to break out above its 50-day moving average of $36.43 a share and then once it takes out more key overhead resistance levels at $37.86 to $37.88 a share with high volume. Look for volume on that move that hits near or above its three-month average volume of 1.25 million shares. If that breakout gets underway post-earnings, then ZU will set up to re-test or possibly take out its next major overhead resistance levels at $41.89 to $42.56 a share. Any high-volume move above those levels will then give ZU a chance to re-fill some of its previous gap-down-day zone from May that started near $50 a share.

I would simply avoid ZU or look for short-biased trades if after earnings it fails to trigger that breakout and then drops back below some key near-term support levels at $33.40 to $33 a share and then below $31.81 a share with high volume. If we get that move, then ZU will set up to re-test or possibly take out its next major support levels at $29.05 to its 52-week low of $28.75 a share.

Conversant

Another potential earnings short-squeeze candidate is digital marketing services player Conversant (CNVR), which is set to release numbers on Wednesday after the market close. Wall Street analysts, on average, expect Conversant to report revenue of $138.14 million on earnings of 35 cents per share.

The current short interest as a percentage of the float for Conversant is extremely high at 26.5%. That means that out of the 62.32 million shares in the tradable float, 16.55 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 16.7%, or by about 2.37 million shares. If the bears get caught pressing their bets into a strong quarter, then shares of CNVR could easily rip sharply higher post-earnings as the shorts rush to cover some of their positions.

From a technical perspective, CNVR is currently trending above both its 50-day and 200-day moving averages, which is bullish. This stock is just starting to spike higher right off its 50-day moving average of $24.42 a share. This spike is starting to push shares of CNVR within range of triggering a major breakout trade post-earnings above some key overhead resistance levels.

If you're bullish on CNVR, then I would wait until after its report and look for long-biased trades if this stock manages to break out above some near-term overhead resistance levels at $25.50 to $25.94 a share and then above $26.19 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 712,319 shares. If that breakout starts post-earnings, then CNVR will set up to re-test or possibly take out its next major overhead resistance level at its 52-week high at $28.79 a share to $32.25 a share.

I would avoid CNVR or look for short-biased trades if after earnings it fails to trigger that breakout and then takes out its 200-day moving average of $23.60 a share to some more key support levels at $23.35 to $22.87 a share with high volume. If we get that move, then CNVR will set up to re-test or possibly take out its next major support levels at $22.21 to $20.52 a share, or even its 52-week low of $18.62 a share.

Rocket Fuel

Another earnings short-squeeze prospect is artificial-intelligence digital advertising solutions provider Rocket Fuel (FUEL), which is set to release numbers on Tuesday after the market close. Wall Street analysts, on average, expect Rocket Fuel to report revenue of $90.22 million on a loss of 22 cents per share.

The current short interest as a percentage of the float for Rocket Fuel is extremely high a 23.7%. That means that out of the 18.61 million shares in the tradable float, 4.42 million shares are sold short by the bears. This is a very large short interest on a stock with a low tradable float. If the bulls get the earnings news they're looking for, then shares of FUEL could easily explode sharply higher post-earnings as the bears jump to cover some of their positions.

From a technical perspective, FUEL is currently trending just above its 50-day moving average and well below its 200-day moving average, which is neutral trendwise. This stock has been uptrending a bit over the last few weeks, with shares moving higher from its low of $22.07 to its recent high of $27.04 a share. During that move, shares of FUEL have been making mostly higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of FUEL within range of triggering a near-term breakout trade post-earnings.

If you're bullish on FUEL, then I would wait until after its report and look for long-biased trades if this stock manages to break out above some near-term overhead resistance levels at $27.04 to $29 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 771,327 shares. If that breakout starts post-earnings, then FUEL will set up to re-test or possibly take out its next major overhead resistance levels at $31.61 to $31.84 a share. Any high-volume move above those levels will then give FUEL a chance to tag its next major overhead resistance levels at $35.08 to $38.32 a share.

I would simply avoid FUEL or look for short-biased trades if after earnings it fails to trigger that breakout and then takes out some key near-term support at $24.32 a share with high volume. If we get that move, then FUEL will set up to re-test or possibly take out its next major support levels $22.07 to its 52-week low of $19.31 a share. Any high-volume move below $19.31 will then push shares of FUEL into new 52-week-low territory, which is bearish technical price action.

First Solar

My final earnings short-squeeze trade idea is solar energy player First Solar (FSLR), which is set to release numbers on Tuesday after the market close. Wall Street analysts, on average, expect First Solar to report revenue of $795.88 million on earnings of 37 cents per share.

Just recently, Brean Capital issued a report that said shares of First Solar are dramatically undervalued due to the market favoring distributed generation over utility of scale exposure. Brean has a buy rating on the stock and an $83 per share price target.

The current short interest as a percentage of the float for First Solar is pretty high at 12.4%. That means that out of the 73.25 million shares in the tradable float, 9.11 million shares are sold short by the bears. If the bulls get the earnings news they're looking for, then shares of FSLR could easily jump sharply higher post-earnings as the shorts rush to cover some of their trades.

From a technical perspective, FSLR is currently trending above its 200-day moving average and just below its 50-day moving average, which is neutral trendwise. This stock has been trending sideways and consolidating for the last month, with shares moving between $60.58 on the downside and $66.68 on the upside. Any high-volume move above the upper-end of its recent range post-earnings could easily trigger a big breakout trade for shares of FSLR.

If you're in the bull camp on FSLR, then I would wait until after its report and look for long-biased trades if this stock manages to break out above its 50-day moving average of $65.16 a share to more near-term overhead resistance at $66.68 a share with high volume. Look for volume on that move that registers near or above its three-month average action of 2.83 million shares. If that breakout kicks off post-earnings, then FSLR will set up to re-test or possibly take out its next major overhead resistance levels at $72.68 to its 52-week high at $74.84 a share. Any high-volume move above those levels will then give FSLR a chance to tag $80 a share.

I would avoid FSLR or look for short-biased trades if after earnings it fails to trigger that breakout, and then drops back below some key near-term support levels at $60.58 to $57.80 a share with high volume. If we get that move, then FSLR will set up to re-test or possibly take out its next major support levels at $52.42 to $49.52 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 Delafield, Wis.

RELATED LINKS:

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 Delafield, Wis., 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.

More from Investing

GE Is Too Opaque, Too Diversified and Too Poorly Managed: Doug Kass Insider

GE Is Too Opaque, Too Diversified and Too Poorly Managed: Doug Kass Insider

GE Rises on Earnings and Revenue Beats Despite Weakness in Power

GE Rises on Earnings and Revenue Beats Despite Weakness in Power

3 Key Things to Watch for in Google's Earnings on Monday

3 Key Things to Watch for in Google's Earnings on Monday

Google's YouTube in Hot Water Again Over Ads on Inappropriate Content

Google's YouTube in Hot Water Again Over Ads on Inappropriate Content

Should Tesla Nominate a New CEO Not Named Elon Musk?

Should Tesla Nominate a New CEO Not Named Elon Musk?