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.

iRobot

IRBT ChartIRBT data by YCharts

My first earnings short-squeeze trade idea is robot maker iRobot (IRBT), which is set to release numbers on Tuesday after the market close. Wall Street analysts, on average, expect iRobot to report revenue of $144.60 million on earnings of 6 cents per share.

The current short interest as a percentage of the float for iRobot is pretty high at 14.3%. That means that out of the 27.16 million shares in the tradable float, 3.89 million shares are sold short by the bears. If the bulls get the earnings news they're looking for, then shares of iRobot could easily soar sharply higher post-earnings as the bears scramble to cover some of their positions.

From a technical perspective, iRobot is currently trending below both its 50-day and 200-day moving averages, which is bearish. This stock has been trending sideways over the last two months and change, with shares moving between $30.78 on the downside and $33.83 on the upside. Any high-volume move above the upper-end of its recent sideways trending chart pattern post-earnings could trigger a big breakout trade for shares of iRobot.

If you're bullish on iRobot, 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 $32.89 to its 200-day at $33.13 and then above $33.83 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 307,135 shares. If that breakout triggers post-earnings, then this stock will set up to re-test or possibly take out its next major overhead resistance levels at $35 to $36.36, or even its 52-week high of $38.88 a share. Any high-volume move above $38.88 will then give this stock a chance to tag or trend north of $40 a share.

I would simply avoid iRobot 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 $30.78 to $29.92 a share with high volume. If we get that move, then this stock will set up to re-test or possibly take out its next major support level at its 52-week low of $28.05 a share.

Tile Shop

TTS ChartTTS data by YCharts

Another potential earnings short-squeeze play is Tile Shop (TTS), which operates as a specialty retailer of manufactured and natural stone tiles, setting and maintenance materials, and related accessories. Tile Shop is set to release numbers on Tuesday before the market open. Wall Street analysts, on average, expect the company to report revenue $73.74 million on earnings of 9 cents per share.

The current short interest as a percentage of the float for Tile Shop is extremely high at 27.9%. That means that out of the 22.91 million shares in the tradable float, 6.41 million shares are sold short by the bears. This stock sports a high short interest and a very low tradable float. Any bullish earnings news could easily set off a monster short squeeze for shares of Tile Shop post-earnings that sends the bears running to cover some of their trades.

From a technical perspective, Tile Shop is currently trending above both its 50-day and 200-day moving averages, which is bullish. This stock has been uptrending over the last six months, with shares moving higher from its low of $6.95 to its recent high of $15.25 share. During that uptrend, shares of Tile Shop have been making mostly higher lows and higher highs, which is bullish technical price action.

If you're in the bull camp on Tile Shop, 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 $15.25 a share with high volume. Look for volume on that move that registers near or above its three-month average volume of 423,106 shares. If that breakout triggers post-earnings, then this stock will set up to enter new 52-week-high territory, which is bullish technical price action. Some possible upside targets off that move are $19 to $20 a share.

I would simply avoid Tile Shop 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 $13.77 to more near-term support at $12.88 a share with high volume. If we get that move, then this stock will set up to re-test or possibly take out its next major support levels at $11.96 to its 200-day moving average of $10.92 a share.

Altisource

ASPS ChartASPS data by YCharts

Another potential earnings short-squeeze candidate is Altisource (ASPS), which operates as a marketplace and transaction solutions provider for the real estate, mortgage and consumer debt industries. Altisource is set to release numbers on Thursday before the market open. Wall Street analysts, on average, expect it to report revenue of $229.45 million on earnings of $1.34 per share.

The current short interest as a percentage of the float for Altisource is very high at 48.6%. That means that out of the 9.37 million shares in the tradable float, 4.55 million shares are sold short by the bears. This is a large short interest on a stock with a very low tradable float. Any bullish earnings news could easily send the bears scrambling to cover some of their positions post-earnings and send the stock screaming to the upside.

If you're bullish on Altisource, 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 $32 to $33.59 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 528,403 shares. If that breakout kicks off post-earnings, then this stock will set up to re-test or possibly take out its next major overhead resistance levels at its 200-day moving average of $36.71 to around $45 a share.

I would avoid Altisource 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 $27.34 to $26.40 a share with high volume. If we get that move, then this stock will set up to re-test or possibly take out its major support levels at $23.44 to $20 a share.

Jakks Pacific

JAKK ChartJAKK data by YCharts

Another earnings short-squeeze prospect is toy and games maker Jakks Pacific (JAKK), which is set to release numbers on Wednesday before the market open. Wall Street analysts, on average, expect Jakks Pacific to report revenue of $124.49 million on a loss of 35 cents per share.

The current short interest as a percentage of the float for Jakks Pacific is extremely high at 57.3%. That means that out of 12.18 million shares in the tradable float, 6.98 shares are sold short by the bear. This is a monster short interest on a stock with a very low tradable float. Any bullish earnings news could easily set off a huge short-squeeze for shares of Jakks Pacific post-earnings that sends the bears running to cover some of their positions.

From a technical perspective, Jakks Pacific is currently trending above both its 50-day and 200-day moving averages, which is bullish. This stock has been uptrending over the last three months, with shares moving higher from its low of $6.60 to its recent high of $10.19 a share. During that move, this stock has been making mostly higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of Jakks Pacific within range of triggering a big breakout trade post-earnings.

If you're bullish on Jakks Pacific, 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 $9.14 to its 52-week high of $10.19 a share with high volume. Look for volume on that move that registers near or above its three-month average volume of 594,264 shares. If that breakout materializes post-earnings, then this stock will set up to enter new 52-week-high territory, which is bullish technical price action. Some possible upside targets off that move are $11.75 to $13.50 a share.

I would simply avoid Jakks Pacific 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 its 50-day moving average of $8.44 a share with high volume. If we get that move, then this stock will set up to re-test or possibly take out its next major support levels at $7.45 to its 200-day moving average of $7.19, or even more support at $6.60 a share.

IGI Laboratories

IG ChartIG data by YCharts

My final earnings short-squeeze trading opportunity is specialty generic pharmaceutical player IGI Laboratories  (IG), which is set to release numbers on Thursday after the market close. Wall Street analysts, on average, expect IGI Laboratories to report revenue of $7.63 million on a loss of 8 cents per share.

The current short interest as a percentage of the float for IGI Laboratories is extremely high at 28.7%. That means that out of the 39.83 million shares in the tradable float, 11.45 million shares are sold short by the bears. This is another stock with a huge short interest that also sports a low tradable float. If the bulls get the earnings news they're looking for, then this stock could easily experience a monster short-squeeze that sends the bears scrambling to cover some of their positions.

From a technical perspective, IGI Laboratories 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 over the last three months and change, with shares moving higher from its low of $4.75 to its recent high of $7.32 a share. During that uptrend, shares of IGI Laboratories have been making mostly higher lows and higher highs, which is bullish technical price action. That move has now pushed this stock within range of triggering a major breakout trade post-earnings above some key near-term overhead resistance levels.

If you're in the bull camp on IGI Laboratories, 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 $7 to $7.32 a share with high volume. Look for volume on that move that registers near or above its three-month average action of 860,967 shares. If that breakout begins post-earnings, then this stock will set up to re-fill some of its previous gap-down-day zone from April that started near $9 a share. Any high-volume move above $9 will then give this stock a chance to tag $9.40 to $10 a share. or even $10.50 a share.

I would avoid IGI Laboratories 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 $6.26 to $6.13, and then below more key support at $5.82 a share with high volume. If we get that move, then this stock will set up to re-test or possibly take out its next major support levels at $5.50 to $5 a share, or even $4.95 to $4.75 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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