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.

Sanderson Farms

My first earnings short-squeeze play is integrated poultry processing player Sanderson Farms  (SAFM - Get Report) , which is set to release numbers on Thursday before the market open. Wall Street analysts, on average, expect Sanderson Farms to report revenue of $699.20 million on earnings of $1.42 per share.

The current short interest as a percentage of the float for Sanderson Farms is extremely high at 39.6%. That means that out of the 19.60 million shares in the tradable float, 7.76 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 3.8%, or by about 286,000 shares. If the bears get caught pressing their bets into bullish quarter, then this stock could easily spike sharply higher post-earnings as the bears rush to cover some of their positions.

From a technical perspective, Sanderson Farms is currently trending above its 50-day moving average and just below its 200-day moving average, which is neutral trendwise. This stock has been uptrending over the last two months and change, with shares moving higher from its low of $64.54 to its recent high of $77.38 a share. During that uptrend, shares of Sanderson Farms 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 near-term breakout trade post-earnings.

If you're bullish on Sanderson Farms, 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 $76 to $77.38 a share with high volume. Look for volume on that move that registers near or above its three-month average action of 388,894 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 $80.29 to $82, or even $84 to $85.50 a share. Any high-volume move above those levels will then give this stock a chance to make a run at its 52-week high of $91.50 a share.

I would simply avoid Sanderson Farms 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 its 50-day moving average of $70.68 to $70.53 a share with high volume. If we get that move, then this stock will set up to re-test or take out its next major support levels at $68 to $66.50, or even $66 to $64.50 a share.

BlackBerry

Another potential earnings short-squeeze trade idea is wireless communications solutions player BlackBerry  (BBRY) , which is set to release numbers on Friday before the market open. Wall Street analysts, on average, expect BlackBerry to report revenue $487.92 million on a loss of 15 cents per share.

The current short interest as a percentage of the float for BlackBerry is pretty high at 15%. That means that out of the 522.94 million shares in the tradable float, 78.69 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 6.5%, or by about 4.77 million shares. If the bears get caught pressing their bets into a strong quarter, then this stock could easily jump sharply higher post-earnings as the bears move fast to cover some of their positions.

From a technical perspective, BlackBerry 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 month or so, with shares moving between $7.15 on the downside and $8.25 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 BlackBerry.

If you're in the bull camp on BlackBerry, 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 $8.14 to $8.25 a share and then above its 200-day moving average of $8.40 a share with high volume. Look for volume on that move that hits near or above its three-month average volume of 6.55 million 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 $9 to $9.50, or even $10.50 to $11 a share.

I would simply avoid BlackBerry 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 $7.28 to $7.15 a share and then below more support at $6.96 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 its 52-week low of $5.96 a share.

CarMax

Another potential earnings short-squeeze candidate is used vehicles retail player CarMax  (KMX - Get Report) , which is set to release numbers on Friday before the market open. Wall Street analysts, on average, expect CarMax to report revenue of $3.65 billion on earnings of 69 cents per share.

The current short interest as a percentage of the float for CarMax is pretty high at 10.6%. That means that out of the 201.46 million shares in the tradable float, 21.54 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 9.2%, or by about 1.82 million 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 bear run to cover some of their trades.

From a technical perspective, CarMax is currently trending below its 200-day moving average and just above its 50-day moving average, which is neutral trendwise. This stock jumped a modestly higher on Monday back above both its 20-day moving average of $57.55 and its 50-day moving average of $57.59 a share with strong upside volume flows. This high-volume move to the upside is now starting to push this stock within range of triggering a big breakout trade post-earnings.

If you're bullish on CarMax, 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 $60 to $60.60 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 1.99 million shares. If that breakout fires off post-earnings, then this stock will set up to re-test or possibly take out its next major overhead resistance levels at $63 to $64, or even its 200-day moving average of $64.34 to $66 a share.

I would avoid CarMax 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 $56 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 its 52-week low of $53.46 to $50 a share.


Darden Restaurants

Another earnings short-squeeze prospect is full-service restaurants operator Darden Restaurants  (DRI - Get Report) , which is set to release numbers on Friday before the market open. Wall Street analysts, on average, expect Darden Restaurants to report revenue of $1.62 billion on earnings of 42 cents per share.

The current short interest as a percentage of the float for Darden Restaurants is notable at 8.5%. That means that out of 105.74 million shares in the tradable float, 9.04 million shares are sold short by the bear. If this company can deliver the earnings news the bulls are looking for, then shares of Darden Restaurants could easily trend sharply higher post-earnings as the bears rush to cover some of their positions.

From a technical perspective, Darden Restaurants is currently trending above its 50-day moving average and just 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 $53.38 to its recent high of $59.74 a share. During that uptrend, shares of Darden Restaurants 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 Darden Restaurants, 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 200-day moving average of $59.38 to $59.74 a share with high volume. Look for volume on that move that hits near or above its three-month average volume of 1.81 million shares. If that breakout gets started post-earnings, then this stock will set up to re-test or possibly take out its next major overhead resistance levels at $65 to $65, or even $67 a share.

I would simply avoid Darden Restaurants 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 $56.89 a share and its 20-day moving average of $56.51 a share with high volume. If we get that move, then this stock will set up to re-test possibly take out its next major support levels at $55 to its 52-week low of $53.38 a share. Any high-volume move below $53.38 will then push this stock into new 52-week-low territory, which is bearish technical price action.

Lennar

My final earnings short-squeeze play is homebuilding player Lennar  (LEN - Get Report) , which is set to release numbers on Friday before the market open. There are currently no analysts' estimates available for Lennar.

The current short interest as a percentage of the float for Lennar is pretty high at 12.3%. That means that out of the 184.12 million shares in the tradable float, 22.81 million shares are sold short by the bears. If this company can produce the earnings news the bulls are looking for, then shares of Lennar could easily spike sharply higher post-earnings as the bears move fast to cover some of their positions.

From a technical perspective, Lennar is currently trending below both its 50-day and 200-day moving averages, which is bearish. This stock has consolidating and trending sideways over the last two months, with shares moving between $47.27 on the downside and $52.50 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 Lennar.

If you're in the bull camp on Lennar, 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 moving average of $50.38 a share and its 20-day moving average of $50.61 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 2.52 million shares. If that breakout develops post-earnings, then this stock will set up to re-test or possibly take out its next major overhead resistance levels at $52.20 to $56, or even $60 a share.

I would avoid Lennar 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 $47.27 to $46.19 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 $44.70 to its 52-week low of $41.25 a share.

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