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, let's take a look at several stocks that could experience big short squeezes when they report earnings this week.

Pacific Ethanol

My first earnings short-squeeze trading opportunity is low-carbon renewable fuels producer Pacific Ethanol  (PEIX - Get Report), which is set to release numbers on Wednesday after the market close. Wall Street analysts, on average, Pacific Ethanol to report revenue of $246.37 million on earnings of 17 cents per share.

The current short interest as a percentage of the float for Pacific Ethanol is very high at 16.2%. That means that out of the 22.54 million shares in the tradable float, 3.65 million shares are sold short by the bears. If this company can deliver the earnings news the bulls are looking for, then shares of PEIX could easily jump sharply higher post-earnings as the bears move fast to cover some of their trades.

From a technical perspective, PEIX is currently trending below both its 50-day and 200-day moving averages, which is bearish. This stock has been uptrending over the last two months, with shares moving higher from its low of $7.51 to its recent high of $10.24 a share. During that uptrend, shares of PEIX have been making mostly higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of PEIX within range of triggering a near-term breakout trade post-earnings.

If you're bullish on PEIX, then I would wait until after its report and look for long-biased trades if this stock manages to break out above some key near-term overhead resistance at $10.24 a share with high volume. Look for volume on that move that registers near or above its three-month average action of 1.18 million shares. If that breakout begins post-earnings, then shares of PEIX will set up to re-test or possibly take out its next major overhead resistance levels at $11.75 to $13 a share, or even its 200-day moving average of $13.94 a share.

I would simply avoid PEIX 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 $8.67 to $8.32 a share with high volume. If we get that move, then PEIX will set up to re-test or possibly take out its next major support level at its 52-week low of $7.51 a share.

Autohome

Another potential earnings short-squeeze trade idea is China-based online automobile information player Autohome  (ATHM - Get Report), which is set to release its numbers on Wednesday before the market open. Wall Street analysts, on average, expect Autohome to report revenue $637.60 million on earnings of $1.66 per share.

The current short interest as a percentage of the float for Autohome is very high at 14.3%. That means that out of the 33.99 million shares in the tradable float, 4.87 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 20.9%, or by about 842,000 shares. If the shorts get caught pressing their trades into a strong quarter, then shares of ATHM could easily spike sharply higher post-earnings as the bears rush to cover some of their positions.

From a technical perspective, ATHM is currently trending above its 50-day moving average an just below its 200-day moving average, which is neutral trendwise. This stock recently formed a major bottoming chart pattern, after shares found buying interest at $34.14, $34.50 and $34.69 a share. Following that bottom, shares of ATHM have now started to spike higher and trend back above its 50-day moving average of $37.21 a share. That trend is now quickly pushing shares of ATHM within range of triggering a major breakout trade post-earnings above some key near-term overhead resistance level.

If you're in the bull camp on ATHM, then I would wait until after its report and look for long-biased trades if this stock manages to break out above its 200-day moving average of $39.72 a share to some more near-term overhead resistance at $39.88 a share with high volume. Look for volume on that move that hits near or above its three-month average volume of 584,179 shares. If that breakout develops post-earnings, then ATHM will set up to re-test or possibly take out its next major overhead resistance levels at $41.99 to $45.79 a share.

I would simply avoid ATHM or look for short-biased trades if after earnings it fails to trigger that breakout and then drops back below its 50-day moving average of $37.21 a share with high volume. If we get that move, then ATHM will set up to re-test or possibly take out its next major support levels at $34.69 to $34.50 a share, or $34.14 a share. Any high-volume move below those levels will then give ATHM a chance to tag its next major support level at its 52-week low of $28.50 a share.

Fresh Market

Another potential earnings short-squeeze candidate is specialty food retailer Fresh Market  (TFM), which is set to release numbers on Thursday after the market close. Wall Street analysts, on average, expect Fresh Market to report revenue of $482.91 million on earnings of 51 cents per share.

The current short interest as a percentage of the float for Fresh Market is extremely high at 24.9%. That means that out of the 39.43 million shares in the tradable float, 9.82 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 7.7%, or by about 701,000 shares. If the shorts get caught pressing their bets into a bullish quarter, then shares of TFM could easily spike sharply higher post-earnings as the bears scramble cover some of their positions.

From a technical perspective, TFM is currently trending above its 200-day moving average and just below its 50-day moving average, which is neutral trendwise. This stock recently formed a double bottom chart pattern, after shares found buying interest at $35.68 to $35.51 a share. Following that bottom, shares of TFM have started to uptrend and this stock is now quickly moving within range of triggering a near-term breakout trade above some key overhead resistance levels post-earnings.

If you're bullish on TFM, then I would wait until after its report and look for long-biased trades if this stock manages to break out above some key near-term overhead resistance levels at $39.13 to $40 a share with high volume. Look for volume on that move that registers near or above its three-month average action of 525,034 shares. If that breakout begins post-earnings, then TFM will set up to re-test or possibly take out its next major overhead resistance level at $41.93 to its 52-week high at $42.12 a share. Any high-volume move above $42.12 will then give TFM a chance to re-fill some of its previous gap-down-day zone from December of 2013 that started near $50 a share.

I would avoid TFM 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 $37 a share to its 200-day moving average of $35.41 a share high volume. If we get that move, then TFM will set up to re-test or possibly take out its next major support levels at $32.20 a share.

Installed Building Products

Another earnings short-squeeze prospect is general building materials player Installed Building Products  (IBP - Get Report), which is set to release numbers on Wednesday before the market open. Wall Street analysts, on average, expect Installed Building Products to report revenue of $141.18 million on earnings of 20 cents per share.

The current short interest as a percentage of the float for Installed Building Products stands at 7.4%. That means that out of 15.52 million shares in the tradable float, 1.15 million shares are sold short by the bears. This is a decent short interest on a stock with a very low tradable float. Any bullish earnings news could easily kick off a large short-covering rally post-earnings for IBP that forces the bears to cover some of their positions.

From a technical perspective, IBP is currently trending above both its 50-day and 200-day moving averages, which is bullish. This stock has been consolidating and trending sideways over the last three months, with shares moving between $16.88 on the downside and $19.04 on the upside. Shares of IBP spiked sharply higher on Monday back above its 50-day moving average of $18.06 a share with strong upside volume flows. That move is now quickly pushing shares of IBP within range of triggering a major breakout trade above the upper-end of its sideways trending chart pattern post-earnings.

If you're bullish on IBP, then I would wait until after its report and look for long-biased trades if this stock manages to break out above some key near-term overhead resistance levels at $18.87 a share to its all-time high of $19.04 a share with high volume. Look for volume on that move that hits near or above its three-month average volume of 52,705 shares. If that breakout kicks off post-earnings, then IBP will set up to enter new all-time-high territory, which is bullish technical price action. Some possible upside targets off that move are $25 to $30 a share.

I would simply avoid IBP 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 $17 to $16.88 a share with high volume. If we get that move, then IBP will set up re-test or possibly take out its next major support levels at its 200-day moving average of $14.95 to $14.07 a share, or even $13.62 a share.

E.W. Scripps

My final earnings short-squeeze play is media player E.W. Scripps  (SSP - Get Report), which is set to release numbers on Wednesday before the market open. Wall Street analysts, on average, expect E.W. Scripps to report revenue of $248.76 million on earnings of 40 cents per share.

The current short interest as a percentage of the float for E.W. Scripps is notable at 9.6%. That means that out of the 29.52 million shares in the tradable float, 3.51 million shares are sold short by the bears. This is a decent short interest on a stock with a very low tradable float. If E.W. Scripps can deliver the earnings news the bulls are looking for, then shares of SSP could easily trend sharply higher post-earnings as the shorts move fast to cover some of their positions.

From a technical perspective, SSP is currently trending above both its 50-day and 200-day moving averages, which is bullish. This stock has been uptrending strong over the last two months, with shares moving higher from its low of $19.57 to its recent high of $23.48 a share. During that uptrend, shares of SSP have been making mostly higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of SSP within range of triggering a major breakout trade post-earnings.

If you're in the bull camp on SSP, then I would wait until after its report and look for long-biased trades if this stock manages to break out above its 52-week high of $23.48 a share (or above Tuesday's intraday if greater) with high volume. Look for volume on that move that hits near or above its three-month average action of 227,884 shares. If that breakout gets started post-earnings, then SSP will set up to enter new 52-week-high territory, which is bullish technical price action. Some possible upside targets off that move are $30 to $35 a share.

I would avoid SSP or look for short-biased trades if after earnings it fails to trigger that breakout, and then drops back below its 50-day moving average of $21.32 a share and its 200-day moving average of $19.87 a share and then below $19.59 to $19.57 a share with high volume. If we get that move, then SSP will set up to re-test or possibly take out its next major support level at $17.30 to around $16 a share.

-- Written by Roberto Pedone in Delafield, Wis.

 

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.