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

Restoration Hardware

My first earnings short-squeeze play is home furnishing stores player Restoration Hardware  (RH), which is set to release numbers on Thursday after the market close. Wall Street analysts, on average, expect Restoration Hardware to report revenue of $418.97 million on earnings of 20 cents per share.

The current short interest as a percentage of the float for Restoration Hardware is extremely high at 27.6%. That means that out of the 32.82 million shares in the tradable float, 9.06 million shares are sold short by the bears. This stock sports a high short interest and a low tradable float. Any bullish earnings news could easily set off a large short-squeeze post-earnings that sends the bears scrambling to cover some of their positions.

From a technical perspective, Restoration Hardware is currently trending above both its 50-day and 200-day moving averages, which is bullish. This stock has been uptrending over the last month or so, with shares moving higher from its low of $85.82 to its recent high of $93.88 a share. During that uptrend, shares of RH have been consistently making higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of Restoration Hardware within range of triggering a near-term breakout trade post-earnings.

If you're bullish on Restoration Hardware, 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 $95 to $97 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 656,867 shares. If that breakout hits post-earnings, then shares of Restoration Hardware will set up to re-test or possibly take out its next major overhead resistance levels at $99 to its all-time high of $102 a share. Any high-volume move above $102 will then give RH a chance to tag $105 to $110 a share.

I would simply avoid Restoration Hardware 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 its 50-day moving average of $91.38 a share to $90 a share with high volume. If we get that move, then Restoration Hardware will set up to re-test or possibly take out its next major support levels at its 200-day moving average of $87.32 to $85 a share, or even $84 to $80 a share.

ExOne

Another potential earnings short-squeeze trading opportunity is ExOne  (XONE), which is set to release numbers on Thursday after the market close. Wall Street analysts, on average, expect ExOne to report revenue $8.12 million on a loss of 29 cents per share.

The current short interest as a percentage of the float for ExOne is extremely high at 34.2%. That means that out of the 9.53 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 3%, or by about 93,000 shares. If the bears get caught pressing their bets into a bullish quarter, then shares of ExOne could easily jump sharply higher post-earnings as the bears rush to cover some of their positions.

From a technical perspective, ExOne is currently trending below both its 50-day and 200-day moving averages, which is bearish. This stock recently formed a double bottom chart pattern, after it found buying interest at $11.86 to $12 a share. Following that bottom, shares of ExOne have started to trend higher and it's now beginning to move within range of triggering a near-term breakout trade post-earnings.

If you're in the bull camp on ExOne, 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 its 50-day moving average of $13.66 a share to $13.70 a share and then above $14 to $14.50 a share with high volume. Look for volume on that move that registers near or above its three-month average volume of 180,852 shares. If that breakout triggers post-earnings, then ExOne will set up to re-test or possibly take out its next major overhead resistance levels at $16 to $17.79 a share, or even $18 a share.

I would simply avoid ExOne 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 $12 to its all-time low of $11.86 a share with high volume. If we get that move, then ExOne will set up to enter new all-time-low territory, which is bearish technical price action. Some possible downside targets off that move are $10 to $9 a share, or even $8 a share.

Bazaarvoice

Another potential earnings short-squeeze candidate is application software player Bazaarvoice  (BV), which is set to release numbers on Wednesday after the market close. Wall Street analysts, on average, expect Bazaarvoice to report revenue of $48.64 million on a loss of 7 cents per share.

The current short interest as a percentage of the float for Bazaarvoice is pretty high at 9%. That means that out of the 46.84 million shares in the tradable float, 4.23 million shares are sold short by the bears. If this company can produce the earnings news the bulls are looking for, then shares of Bazaarvoice could easily rip sharply higher post-earnings as the bears move fast to cover some of their positions.

From a technical perspective, Bazaarvoice is currently trending above its 50-day moving average and below its 200-day moving average, which is neutral trendwise. This stock has been uptrending a bit over the last month, with shares moving higher from its low of $5.21 to its recent high of $6.16 a share. During that uptrend, shares of Bazaarvoice have been making mostly higher lows and higher highs, which is bullish technical price action. That uptrend has now started to push shares of Bazaarvoice within range of triggering a major breakout trade post-earnings.

If you're bullish on Bazaarvoice, 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 $6.16 to $6.75 a share and then above its gap-down-day high from March at $7.35 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 515,530 shares. If that breakout materializes post-earnings, then Bazaarvoice will set up to re-fill some of its previous gap-down-day zone from March that started near $9 a share.

I would avoid Bazaarvoice 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 $5.90 to its 50-day moving average of $5.68 a share with high volume. If we get that move, then Bazaarvoice will set up to re-test or possibly take out its next major support levels at $5.44 to its all-time low of $5.21 a share. Any high-volume move below $5.21 will then give Bazaarvoice a chance to tag $4.50 to $4 a share.

RealD

Another earnings short-squeeze prospect is 3D and other visual technologies licensor RealD  (RLD), which is set to release numbers on Thursday after the market close. Wall Street analysts, on average, expect RealD to report revenue of $26.41 million on a loss of 32 cents per share.

The current short interest as a percentage of the float for RealD stands at 5.4%. That means that out of 39.22 million shares in the tradable float, 2.14 million shares are sold short by the bear. The bears have also been increasing their bets from the last reporting period by 9.5%, or by about 186,000 shares. If the bears get caught pressing their bets into a strong quarter, then shares of RLD could trend sharply higher post-earnings as the bears begin to cover some of their trades.

From a technical perspective, RealD is currently trending above both its 50-day and 200-day moving averages, which is bullish. This stock has been consolidating and trending sideways for the last five months, with shares moving between $11.82 on the downside and $13.53 on the upside. Shares of RealD have now started to trend within range of triggering a big breakout trade post-earnings above the upper-end of its recent sideways trending chart pattern.

If you're bullish on RealD, 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 $13.34 to its 52-week high of $13.53 a share with high volume. Look for volume on that move that hits near or above its three-month average volume of 103,891 shares. If that breakout starts post-earnings, then RealD will set up to re-test or possibly take out its next major overhead resistance levels at $16.05 to $20 a share.

I would simply avoid RealD 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 its 50-day moving average of $12.46 to $11.82 a share and then below its 200-day moving average of $11.56 a share with high volume. If we get that move, then RealD will set up to re-test or possibly take out its next major support levels at $11 to $10.13 a share.

Krispy Kreme Doughnuts

My final earnings short-squeeze play is branded retailer and wholesaler of doughnuts, Krispy Kreme Doughnuts  (KKD), which is set to release numbers on Wednesday after the market close. Wall Street analysts, on average, expect Krispy Kreme Doughnuts to report revenue of $135.99 million on earnings of 22 cents per share.

The current short interest as a percentage of the float for Krispy Kreme Doughnuts stands at 6.3%. That means that out of the 64.18 million shares in the tradable float, 4.04 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 13.2%, or by about 473,000 shares. If the bears get caught pressing their bets into a bullish quarter, then shares of Krispy Kreme could easily spike sharply higher post-earnings as the bears jump to cove some of their trades.

From a technical perspective, Krispy Kreme is currently trending below both its 50-day and 200-day moving averages, which is bearish. This stock has been basing and trending sideways for the last month, with shares moving between $16.90 on the downside and $17.76 a share on the upside. Shares of Krispy Kreme have now started to uptrend off its recent lows and it's now beginning to move within range of triggering a near-term breakout trade above the upper-end of sideways trending chart pattern.

If you're in the bull camp on Krispy Kreme, 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 $17.76 to $18.33 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 584,053 shares. If that breakout develops post-earnings, then Krispy Kreme will set up to re-test or possibly take out its next major overhead resistance levels at $19.57 to $20.45 a share, or even $21 a share.

I would avoid KKD or look for short-biased trades if after earnings it fails to trigger that breakout, and then drops back below some key support levels at $16.90 to $16.41 a share with high volume. If we get that move, then Krispy Kreme will set up to re-test or possibly take out is next major support level at its 52-week low of $14.82 a share.

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

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