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.

Netflix

NFLX Chart NFLX data by YCharts

My first earnings short-squeeze trade idea is Internet television network player Netflix  (NFLX - Get Report) , which is set to release numbers on Tuesday after the market close. Wall Street analysts, on average, expect Netflix to report revenue of $1.83 billion on earnings of 6 cents per share.

The current short interest as a percentage of the float for Netflix is pretty high at 11.4%. That means that out of the 419.12 million shares in the tradable float, 48.05 million shares are sold short by the bears. If the bulls get the earnings news they're looking for, then shares of Netflix could easily spike sharply higher post-earnings as the bears move fast to cover some of their positions.

From a technical perspective, Netflix is currently trending below its 50-day moving average and above its 200-day moving average, which is neutral trendwise. This stock has been downtrending over the last month and change, with shares falling off its high of $133.27 to its recent low of $101.21 a share. During that downtrend, shares of Netflix have been making mostly lower highs and lower lows, which is bearish technical price action. That said, this stock has now started to rebound off that $101.21 low and it's quickly moving within range of triggering a near-term breakout trade.

If you're bullish on Netflix, 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 $110 to its 20-day moving average of $112.89 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 16.57 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 50-day moving average of $117.52 to $122.20, or even $126 a share.

I would simply avoid Netflix 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 $101.21 to $96.26 a share and then below more key support at $93.55 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 $85.50 to $80 a share.

Cree

CREE Chart CREE data by YCharts

Another potential earnings short-squeeze play is technology player Cree  (CREE - Get Report) , which is set to release numbers on Tuesday after the market close. Wall Street analysts, on average, expect Cree to report revenue $434.33 million on earnings of 24 cents per share.

The current short interest as a percentage of the float for Cree is very high at 17.4%. That means that out of the 101.95 million shares in the tradable float, 17.83 million shares are sold short by the bears. If this company can deliver the earnings news the bulls are looking for, then shares of Cree could easily rip sharply higher post-earnings as the bears scramble to cover some of their trades.

From a technical perspective, Cree 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 $28.35 to its recent low of $23.50 a share. During that downtrend, shares of Cree have been making mostly lower highs and lower lows, which is bearish technical price action. That said, this stock has now started to bounce a bit off that $23.50 low, and it's quickly moving within range of triggering a near-term breakout trade.

If you're in the bull camp on Cree, 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 $25 to its 20-day moving average of $25.44 and above its 50-day moving average of $25.88 a share with high volume. Look for volume on that move that hits near or above its three-month average volume of 1.28 million shares. If that breakout hits off post-earnings, then this stock will set up to re-test or possibly take out its next major overhead resistance levels at $27 to its 200-day moving average of $27.37, or even $28 to $29 a share.

I would simply avoid Cree 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 $23.50 to its 52-week low of $22.10 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.

Briggs & Stratton

BGG Chart BGG data by YCharts

Another potential earnings short-squeeze candidate is filtration products and filtration systems and services provider Briggs & Stratton  (BGG - Get Report) , which is set to release numbers on Wednesday after the market close. Wall Street analysts, on average, expect Briggs & Stratton to report revenue of $435.16 million on earnings of 18 cents per share.

The current short interest as a percentage of the float for Briggs & Stratton is very high at 16.4%. That means that out of the 42.37 million shares in the tradable float, 6.97 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 1.3%, or by about 89,000 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, Briggs & Stratton is currently trending below both its 50-day and 200-day moving averages, which is bearish. This stock has been downtrending badly over the last four months and change, with share falling sharply off its high of $21.08 to its recent low of $15.47 a share. During that downtrend, shares of Briggs & Stratton have been making mostly lower highs and lower lows, which is bearish technical price action.

If you're bullish on Briggs & Stratton, 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 $16.50 to its 20-day moving average of $16.68 a share with high volume. Look for volume on that move that registers near or above its three-month average action of 491,481 shares. If that breakout gets set off 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 $17.46 to $17.95, or even its 200-day moving average of $18.76 a share.

I would avoid Briggs & Stratton 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 $15.47 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.

F5 Networks

FFIV Chart FFIV data by YCharts

Another earnings short-squeeze prospect is business software and services player F5 Networks  (FFIV - Get Report) , which is set to release numbers on Wednesday after the market close. Wall Street analysts, on average, expect F5 Networks to report revenue of $485.34 million on earnings of $1.60 per share.

The current short interest as a percentage of the float for F5 Networks is pretty high at 8.6%. That means that out of 70.16 million shares in the tradable float, 6.09 million shares are sold short by the bear. The bears have also been increasing their bets from the last reporting period by 6.4%, or by about 364,000 shares. If the bears get caught pressing their bets into a strong quarter, then this stock could easily spike sharply higher post-earnings as the bears jump to cover some of their short positions.

From a technical perspective, F5 Networks is currently trending below its 50-day and 200-day moving averages, which is bearish. This his stock has been downtrending badly over the last five months, with shares moving lower off its high of $125.66 to its recent low of $90.81 a share. During that downtrend, shares of F5 Networks have been consistently making lower highs and lower lows, which is bearish technical price action. That said, this stock has now started to rebound off that $90.81 low, and it's beginning to trend within range of triggering a near-term breakout trade post-earnings.

If you're bullish on F5 Networks, then I would wait until after its report and look for long-biased trades if this stock manages to break out above its 20-day moving average of $95.72 and then above more key resistance at $97.50 a share with high volume. Look for volume on that move that hits near or above its three-month average volume of 1.36 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 its 50-day moving average of $100.29 to $100.92, or even $105.50 to $107.50 a share.

I would simply avoid F5 Networks 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 $91 to its 52-week low of $91.80 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.

MGIC Investment

MTG Chart MTG data by YCharts

My final earnings short-squeeze trading opportunity is private mortgage insurance provider MGIC Investment  (MTG - Get Report) , which is set to release numbers on Thursday before the market open. Wall Street analysts, on average, expect MGIC Investment to report revenue of $258.51 million on earnings of 26 cents per share.

The current short interest as a percentage of the float for MGIC Investment is notable at 9.7%. That means that out of the 335.86 million shares in the tradable float, 32.76 million shares are sold short by the bears. This stock doesn't sport a huge short interest, but it's more than enough to spark a decent short-covering rally post-earnings if the bulls get the news they're looking for.

From a technical perspective, MGIC Investment is currently trending below both its 50-day and 200-day moving averages, which is bearish. This stock has been downtrending badly over the last six months, with shares falling sharply from over $11 a share to its recent low of $7.31 a share. During that downtrend, this stock has been consistently making lower highs and lower lows, which is bearish technical price action. That move has also pushed shares of MGIC Investment into oversold territory, since its current relative strength index reading is 19.8. Oversold can always get more oversold, but it's also an area where a stock can experience a powerful bounce higher from.

If you're in the bull camp on MGIC Investment, 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 $7.75 to its 20-day moving average of $8.23 a share with high volume. Look for volume on that move that registers near or above its three-month average action of 4.90 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 its 50-day moving average of $8.98 to $9.15, or even $9.45 a share.

I would avoid MGIC Investment or look for short-biased trades if after earnings it fails to trigger that breakout, and then drops back below its new 52-week low of $7.31 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.

 

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