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

Momo

My first earnings short-squeeze trade idea is mobile-based social networking player Momo  (MOMO), which is set to release numbers on Monday after the market close. There are currently no analysts' estimates available for Momo for the upcoming quarter.

The current short interest as a percentage of the float for Momo is 13.7%. That means that out of the 46.11 million shares in the tradable float, 6.35 million shares are sold short by the bears. If the bulls get the earnings news they're looking for, then shares of MOMO could easily rip sharply higher post-earnings as the bears move fast to cover some of their positions.

From a technical perspective, MOMO is currently trending above both its 50-day moving average, which is bullish. This stock has been consolidating and trending sideways for the last five months, with shares moving between $9.50 on the downside and $13.63 on the upside. Shares of MOMO have now started to trend higher right off its 50-day moving average and right above the lower-end of its sideways trending chart pattern. Any high-volume move post-earnings above the upper-end of that chart pattern could trigger a big breakout trade for shares of MOMO.

If you're bullish on MOMO, 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 $12.88 to $13.63 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 458,651 shares. If that breakout develops post-earnings, then shares of MOMO will set up to re-test or possibly take out its next major overhead resistance levels at $16 to its 52-week high of $17.50 a share.

I would simply avoid MOMO 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 $11 a share with high volume. If we get that move, then MOMO will set up to re-test or possibly take out its next major support level at its all-time low of $9.50 a share. Any high-volume move below that level will then give MOMO a chance to trend well below $9 a share.

Take-Two Interactive Software

Another potential earnings short-squeeze trading opportunity is video game player Take-Two Interactive Software  (TTWO), which is set to release its numbers on Monday after the market close. Wall Street analysts, on average, expect Take-Two Interactive Software to report revenue $458.94 million on earnings of 27 cents per share.

The current short interest as a percentage of the float for Take-Two Interactive Software is extremely high at 17.4%. That means that out of the 81.50 million shares in the tradable float, 14.24 million shares are sold short by the bears. If this company can deliver the earnings news the bulls are looking for, then this stock could rip sharply higher post-earnings as the bears scramble to cover some of their trades.

From a technical perspective, TTWO is currently trending below both its 50-day and 200-day moving averages, which is bearish. This stock has been downtrending over the last four months, with shares moving lower from its high of $30.80 to its recent low of $23.30 a share. During that downtrend, shares of TTWO have been making mostly lower highs and lower lows, which is bearish technical price action. That said, shares of TTWO have recently started to bounce off that $23.30 low and it's beginning to move within range of triggering a near-term breakout trade above some key overhead resistance levels.

If you're in the bull camp on TTWO, 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 at $24.93 and its 200-day at $25.32 and then above more key resistance levels at $25.50 to $26.21 a share with high volume. Look for volume on that move that hits near or above its three-month average volume of 1.77 million shares. If that breakout gets going post-earnings, then TTWO will set up to re-test or possibly take out its next major overhead resistance levels $28 to $29 a share, or even its 52-week high of $30.80 a share. Any high-volume move over $30.80 will then give TTWO a chance to trend north towards $35 a share.

I would simply avoid TTWO 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 $23.30 a share with high volume. If we get that move, then TTWO will set up to re-test or possibly take out its next major support levels at $20 to $18.45 a share.

Lakeland Industries

Another potential earnings short-squeeze candidate is industrial safety garments maker Lakeland Industries  (LAKE), which is set to release numbers on Monday after the market close. Wall Street analysts, on average, expect Lakeland Industries to report revenue of $25.89 million on earnings of 23 cents per share.

The current short interest as a percentage of the float for Lakeland Industries sits at 9.6%. That means that out of the 5.96 million shares in the tradable float, 572,000 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 trigger a large short-covering rally for shares of LAKE post-earnings that forces the bears to cover some of their positions.

From a technical perspective, LAKE 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 two months, with shares moving between $8.38 on the downside and $10.12 on the upside. Shares of LAKE are now just starting to trend back above both its 50-day and 200-day moving averages. That trend is starting to push shares of LAKE within range of triggering a big breakout trade post-earnings above some key near-term overhead resistance levels.

If you're bullish on LAKE, 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 $10 to $10.25 a share and then above $10.64 to $10.73 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 93,143 shares. If that breakout kicks off post-earnings, then LAKE will set up to re-test or possibly take out its next major overhead resistance levels at $13.68 to $16 a share.

I would avoid LAKE 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 $8.81 to $8.60 a share and then below $8.38 a share with high volume. If we get that move, then LAKE will set up to re-test or possibly take out its next major support levels at $7.78 to $6.85 a share.

Urban Outfitters

Another earnings short-squeeze prospect is lifestyle specialty retail player Urban Outfitters  (URBN), which is set to release numbers on Monday after the market close. Wall Street analysts, on average, expect Urban Outfitters to report revenue of $758.25 million on earnings of 30 cents per share.

The current short interest as a percentage of the float for Urban Outfitters is notable at 8.2%. That means that out of 98.22 million shares in the tradable float, 8.05 million shares are sold short by the bear. The bears have also been increasing their bets from the last reporting period by 8.7%, or by about around 644,000 shares. If the bears get caught pressing their bets into a bullish quarter, then shares of URBN could easily rip sharply higher post-earnings as the shorts move fast to cover some of their positions.

From a technical perspective, URBN is currently trending below its 50-day moving average and above its 200-day moving average, which is neutral trendwise. This stock has started to trend modestly higher here right above its recent low of $39.29 a share and just above its 200-day moving average of $37.14 a share. That trend is now starting to push shares of URBN within range of triggering a near-term breakout trade above some key overhead resistance levels.

If you're bullish on URBN, then I would wait until after its report and look for long-biased trades if this stock manages to break out above key near-term overhead resistance levels of $42 a share to its 50-day moving average of $42.94 a share with high volume. Look for volume on that move that hits near or above its three-month average volume of 1.83 million shares. If that breakout gets started post-earnings, then URBN will set up to re-test or possibly take out its next major overhead resistance levels at $45.94 to its 52-week high of $47.25 a share. Any high-volume move above $47.25 will then give URBN a chance to tag or take out $50 to $55 a share.

I would simply avoid URBN 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 $39.29 to its 200-day moving average of $37.14 a share with high volume. If we get that move, then URBN will set up to re-test or possibly take out its next major support levels at $34.21 to $32.58 a share, or even $30 a share.

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