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 very bullish technically 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.

SolarCity

My first earnings short-squeeze trade idea is solar energy player SolarCity  (SCTY) , which is set to release numbers on Thursday after the market close. Wall Street analysts, on average, expect SolarCity to report revenue of $111.43 million on a loss of $1.95 per share.

The current short interest as a percentage of the float for SolarCity is extremely high at 52%. That means that out of the 50.03 million shares in the tradable float, 26.06 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 trigger a big short-squeeze for shares of SolarCity post-earnings.

From a technical perspective, SolarCity is currently trending below both its 50-day and 200-day moving averages, which is bearish. This stock has been downtrending over the last month, with shares moving lower off its high of $49.38 to its intraday low on Tuesday of $37.14 a share. During that downtrend, shares of SolarCity have been making mostly lower highs and lower lows, which is bearish technical price action.

If you're bullish on SolarCity, 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 at $40 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 2.84 million 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 its 20-day moving average of $43.79 or its 50-day moving average of $45.42, or even $50 a share.

I would simply avoid SolarCity or look for short-biased trades if after earnings it fails to trigger that breakout and then drops back below its 52-week low of $34.65 a share with high volume. If we get that move, then this stock will set up to enter new 52-week-low territory, which is bearish technical price action. Some possible downside targets off that move are $30 to $28 a share.


Heartware International

Another potential earnings short-squeeze play is medical device player Heartware International  (HTWR) , which is set to release numbers on Thursday before the market open. Wall Street analysts, on average, expect Heartware International to report revenue of $67.54 million on a loss of 56 cents per share.

The current short interest as a percentage of the float for Heartware International is pretty high at 18.2%. That means that out of the 15.92 million shares in the tradable float, 2.91 million shares are sold short by the bears. If the bulls get the earnings news they're looking for, then shares of Heartware International could easily rip sharply higher post-earnings as the bears move fast to cover some of their trades.

From a technical perspective, Heartware International 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 few weeks, with shares moving between $41.68 on the downside and around $45 on the upside. Any high-volume move above the upper-end of that recent range post-earnings could trigger a big breakout trade for shares of Heartware International.

If you're in the bull camp on Heartware International, 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 $45 to its 20-day moving average of $46.30 a share with high volume. Look for volume on that move that hits near or above its three-month average volume of 663,492 shares. If that breakout hits post-earnings, then this stock will set up to re-test or possibly take out its next major overhead resistance levels at $50 to $55, or even $58 to is 50-day moving average of $60.86 a share.

I would simply avoid Heartware International 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 $41.68 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 $34.70 a share.

World Acceptance

Another potential earnings short-squeeze candidate is credit services player World Acceptance  (WRLD) , which is set to release numbers on Thursday before the market open. Wall Street analysts, on average, expect World Acceptance to report revenue of $143.13 million on earnings of $2.26 per share.

The current short interest as a percentage of the float for World Acceptance is extremely high at 79.5%. That means that out of the 5.14 million shares in the tradable float 4.08 million shares are sold short by the bears. This stock sports a monster short interest with a very low tradable float. Any bullish earnings news could easily trigger a huge short-squeeze for shares of World Acceptance post-earnings that sends the bears scrambling to cover some of their trades.

From a technical perspective, World Acceptance 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 over the last month, with shares moving higher from its low of $25.30 to its recent high of $36.13 a share. During that uptrend, shares of World Acceptance 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 big breakout trade post-earnings.

If you're bullish on World Acceptance, then I would wait until after its report and look for long-biased trades if this stock manages to break out above some key overhead resistance levels at $36.13 to $38.12 a share with high volume. Look for volume on that move that registers near or above its three-month average action of 251,094 shares. If that breakout hits post-earnings, then this stock will set up to re-fill some of its previous gap-down-day zone from August which started above $50 a share.

I would avoid World Acceptance or look for short-biased trades if after earnings it fails to trigger that breakout and then drops back below both its 50-day moving average of $31.32 and its 20-day moving average of $30.28 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 $27.76 to its 52-week low of $25.30 a share. Any high-volume move below those levels could set this stock up to make a drop towards $20 a share.

InvenSense

Another earnings short-squeeze prospect is semiconductor player InvenSense  (INVN) , which is set to release numbers on Wednesday after the market close. Wall Street analysts, on average, expect InvenSense to report revenue of $110.84 million on earnings of 15 cents per share.

The current short interest as a percentage of the float for InvenSense is pretty high at 17.6%. That means that out of 83.61 million shares in the tradable float, 14.78 million shares are sold short by the bear. If this company can deliver the earnings news the bulls are looking for, then shares of InvenSense could easily rip sharply higher post-earnings as the bears scramble to cover some of their positions.

From a technical perspective, InvenSense is currently trending below its 200-day moving average and just above its 50-day moving average, which is neutral trendwise. This stock has been consolidating and trending sideways over the last two months, with shares moving between $8.88 on the downside and $10.75 on the upside. Any high-volume move above the upper-end of its recent sideways trending chart pattern post-earnings could trigger a major a breakout trade for shares of InvenSense.

If you're bullish on InvenSense, 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 $10.50 to $10.75 a share with high volume. Look for volume on that move that hits near or above its three-month average volume of 1.76 million shares. If that breakout materializes post-earnings, then this stock will set up to re-test or possibly take out its next major overhead resistance levels at $11.50 to $12.50, or even $13 to its 200-day moving average of $13.57 a share.

I would simply avoid InvenSense or look for short-biased trades if after earnings it fails to trigger that breakout and then drops back below some near-term support levels at $9.95 to its 50-day moving average of $9.90 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 $8.88 to its 52-week low of $8.46 a share.

Theravance

My final earnings short-squeeze trading opportunity is biotechnology player Theravance  (THRX) , which is set to release numbers on Wednesday after the market close. Wall Street analysts, on average, expect Theravance to report revenue of $15.23 million on a loss of 3 cents per share.

The current short interest as a percentage of the float for Theravance is extremely high at 42.6%. That means that out of the 62.13 million shares in the tradable float, 26.52 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 766,000 shares. If the bears get caught pressing their bets into a bullish quarter, then this stock could easily rip sharply higher post-earnings as the bears move fast to cover some of their positions.

From a technical perspective, Theravance 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 shares of Theravance found some buying interest at $7.80 to $7.91 a share. This stock is now starting to trend within range of triggering a big breakout trade above some key near-term overhead resistance levels, which could trigger post-earnings.

If you're in the bull camp on Theravance, 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 $9.05 to $9.57 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 945,725 shares. If that breakout takes hold post-earnings, then this stock will set up to re-test or possibly take out its next major overhead resistance levels at its 50-day moving average of $10.37 to $13, or even its 200-day moving average of $14.39 a share.

I would avoid Theravance 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 $7.91 to $7.80 a share with high volume. If we get that move, then this stock will set up to re-test or possibly take out its 52-week low of $6.36 a share.

Disclosure: 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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