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.

MagicJack VocalTec

My first earnings short-squeeze play is cloud communications player MagicJack VocalTec  (CALL) , which is set to release numbers on Tuesday after the market close. Wall Street analysts, on average, expect MagicJack VocalTec to report revenue of $25 million on earnings of 30 cents per share.

The current short interest as a percentage of the float for MagicJack VocalTec is extremely high at 23%. That means that out of the 11.23 million shares in the tradable float, 2.58 million shares are sold short by the bears. This is currently a low float and high short-interest situation stock. Any bullish earnings news could easily spark a monster short-squeeze for MagicJack VocalTec that forces the bears to start covering some of their short positions.

From a technical perspective, MagicJack VocalTec is currently trending below both its 50-day and 200-day moving averages, which is bearish. This stock has been trending sideways and consolidating over the last month, with shares moving between $7.54 on the downside and $8.30 on the upside. Any high-volume move above the upper-end of its recent sideways trending chart pattern post-earnings could easily trigger a big breakout trade for shares of MagicJack VocalTec.

If you're bullish on MagicJack VocalTec, 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 $7.88 a share to $8.30 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 103,905 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 200-day moving average of $8.69 to $9, or even $9.50 to $10 a share.

I would simply avoid MagicJack VocalTec 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 $7.61 to $7.54 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 $6.88 to its 52-week low of $6.48 a share.

Tiffany

Another potential earnings short-squeeze trade idea is jeweler designer and retailer Tiffany (TIF) , which is set to release numbers on Friday before the market open. Wall Street analysts, on average, expect Tiffany to report revenue $1.22 billion on earnings of $1.41 per share.

The current short interest as a percentage of the float for Tiffany & Co. is notable at 7.4%. That means that out of the 127.38 million shares in the tradable float, 9.48 million shares are sold short by the bears. If the bulls get the earnings news they're looking for, then shares of Tiffany could easily spike sharply higher post-earnings as the bears rush to cover some of their positions.

From a technical perspective, Tiffany is currently trending above its 50-day moving average and well below its 200-day moving averages, which is neutral trendwise. This stock has been uptrending strong over the last two months, with shares moving higher off its low of $59.75 a share to its recent high of $72.39 a share. During that uptrend, shares of Tiffany & Co. 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 in the bull camp on Tiffany, 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 $72.39 to around $74 a share with high volume. Look for volume on that move that hits near or above its three-month average volume of 2.24 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 $79 to its 200-day moving average of $79.23, or even $81.33 to $84 a share.

I would simply avoid Tiffany or look for short-biased trades if after earnings it fails to trigger that breakout and then drops back below its 20-day moving average of $67.70 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 50-day moving average of $66.09 to $62.98, or even $59.73 a share.

Jabil Circuit

Another potential earnings short-squeeze candidate is electronic manufacturing services and solutions player Jabil Circuit  (JBL) , which is set to release numbers on Wednesday after the market close. Wall Street analysts, on average, expect Jabil Circuit to report revenue of $4.50 billion on earnings of 60 cents per share.

The current short interest as a percentage of the float for Jabil Circuit stands at 4.7%. That means that out of the 173.58 million shares in the tradable float, 8.32 million shares are sold short by the bears.

From a technical perspective, Jabil Circuit 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 off its recent low of $18.02 a share to its recent high of $22 a share. During that uptrend, this stock has been making mostly higher lows and higher highs, which is bullish technical price action. Shares of Jabil Circuit are now starting to trend within range of triggering a near-term breakout trade post-earnings.

If you're bullish on Jabil Circuit, then I would wait until after its report and look for long-biased trades if this stock manages to break out above its 200-day moving average of $21.47 to $22 a share with high volume. Look for volume on that move that registers near or above its three-month average action of 2.56 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 $24 to $24.50, or even its 52-week high of $26 a share.

I would avoid Jabil Circuit or look for short-biased trades if after earnings it fails to trigger that breakout and then drops back below its 50-day moving average of $20.25 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 $19 to $18.35, or even $18.02 a share.

Clarcor

Another earnings short-squeeze prospect is filtration products and systems provider Clarcor  (CLC) , which is set to release numbers on Wednesday before the market close. Wall Street analysts, on average, expect Clarcor to report revenue of $310.87 million on earnings of 40 cents per share.

The current short interest as a percentage of the float for Clarcor is notable at 5.9%. That means that out of 48.44 million shares in the tradable float, 2.86 million shares are sold short by the bear.

From a technical perspective, Clarcor 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 strong over the last three months, with shares moving higher off its recent low of $43.92 a share to its high of $52.97 a share. During that uptrend, shares of Clarcor have been consistently making 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 Clarcor, then I would wait until after its report and look for long-biased trades if this stock manages to break out above its 200-day moving average of $52.54 a share and then above more key resistance levels at $52.97 to $53.30 a share with high volume. Look for volume on that move that hits near or above its three-month average volume of 390,869 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 $56 to $60 a share.

I would simply avoid Clarcor 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 $49.88 a share to its 20-day moving average of $49.71 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 50-day moving average of $47.53 to $44.40 a share.

Williams-Sonoma

My final earnings short-squeeze trading opportunity is multi-channel specialty home products retailer Williams-Sonoma  (WSM) , which is set to release numbers on Wednesday after the market close. Wall Street analysts, on average, expect Williams-Sonoma to report revenue of $1.62 billion on earnings of $1.58 per share.

The current short interest as a percentage of the float for Williams-Sonoma is pretty high at 12.3%. That means that out of the 76.71 million shares in the tradable float, 9.47 million shares are sold short by the bears. If this company can deliver the earnings news the bulls are looking for, then shares of Williams-Sonoma could easily rip sharply higher post-earnings as the bears scramble to cover some of their positions.

From a technical perspective, Williams-Sonoma is currently trending 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, with shares moving higher off its low of $47 to its intraday high on Tuesday of $59.03 a share. During that uptrend, shares of Williams-Sonoma 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 in the bull camp on Williams-Sonoma, 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 Tuesday's intraday high of $59.03 to $60 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 1.31 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 $65 to its 200-day moving average of $69.60 a share.

I would avoid Williams-Sonoma or look for short-biased trades if after earnings it fails to trigger that breakout, and then drops back below both its 20-day moving average of $56.28 a share and its 50-day moving average of $53.82 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 $51.83 to $50.29, or even $49.05 to $47 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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