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.

Mattress Firm

 

My first earnings short-squeeze trading opportunity is mattress and related products specially retailer Mattress Firm  (MFRM) , which is set to release numbers on Monday after the market close. Wall Street analysts, on average, expect Mattress Firm to report revenue of $622.36 million on earnings of 56 cents per share.

The current short interest as a percentage of the float for Mattress Firm is very high 49.4%. That means that out of the 13.17 million shares in the tradable float, 6.51 million shares are sold short by the bears. This is a very high short interest on a stock with a low tradable float. If this company can deliver the earnings news the bulls are looking for, then shares of Mattress Firm could easily explode sharply higher post-earnings as the bears rush to cover some of their positions.

From a technical perspective, Mattress Firm 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 a bit over the last few weeks, with shares moving higher off its low of $39.56 to its intraday high on Monday of $43.70 a share. During that uptrend, shares of Mattress Firm 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 Mattress Firm, 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 $44.50 to $46 a share and then above $47.50 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 464,574 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 $49.19 to $52, or even $57.23 a share.

I would simply avoid Mattress Firm 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 $39.56 to $38 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 $36 to $34, or even $32.70 to $32 a share.



HealthEquity

Another potential earnings short-squeeze play is health care information systems player HealthEquity  (HQY - Get Report) , which is set to release numbers on Tuesday after the market close. Wall Street analysts, on average, expect HealthEquity to report revenue $34.89 million on earnings of 4 cents per share.

The current short interest as a percentage of the float for HealthEquity is pretty high at 12%. That means that out of the 34.25 million shares in the tradable float, 4.13 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 11.9%, or by about 440,000 shares. If the bears get caught pressing their bets into a strong quarter, then this stock could easily rip sharply higher post-earnings as the bears run to cover some of their positions.

From a technical perspective, HealthEquity 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 strong over the last two months and change, with shares soaring higher off its new 52-week low of $14.80 a share to its recent high of $23.44 a share. During that uptrend, shares of HealthEquity have been consistently making higher lows and higher highs, which is bullish technical price action. That uptrend has now pushed this stock within range of triggering a big breakout trade post-earnings above some key overhead resistance levels.

If you're in the bull camp on HealthEquity, 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 $23.44 to $24 a share with high volume. Look for volume on that move that registers near or above its three-month average volume of 381,316 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 $27.14 to its 200-day moving average of $28.30, or even $30 to $32 a share.

I would simply avoid HealthEquity 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 $21.48 to $21.42 a share and then below its 50-day moving average of $20.96 a share 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, or even $17 a share.

GameStop

Another potential earnings short-squeeze candidate is multichannel video game retailer GameStop  (GME - Get Report) , which is set to release numbers on Thursday after the market close. Wall Street analysts, on average, expect GameStop to report revenue $3.56 billion on earnings of $2.25 per share.

The current short interest as a percentage of the float for GameStop is extremely high at 38.1%. That means that out of the 102.49 million shares in the tradable float, 39.14 million shares are sold short by the bears. If this company can product the earnings news the bulls are looking for, then shares of GameStop could easily spike sharply higher post-earnings as the bears rush to cover some of their trades.

From a technical perspective, GameStop 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 strong over the last three months, with shares moving higher off its low of $24.05 a share to its recent high of $32.58 a share. During that uptrend, shares of GameStop have been consistently making higher lows and higher highs, which is bullish technical price action. That move is now quickly pushing shares of GameStop within range of triggering a big breakout trade post-earnings.

If you're bullish on GameStop, 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 $32.29 to $32.58 a share and then above more resistance at $33.65 a share with high volume. Look for volume on that move that registers near or above its three-month average action of 2.50 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 200-day moving average of $37.36 to $38.92 a share.

I would avoid GameStop 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 $30.76 a share and then below more key support levels at $28.81 to its 50-day moving average of $28.24 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 $27.47 to $25.84, or even $24.50 to $24 a share.

G-III Apparel Group

Another earnings short-squeeze prospect is G-III Apparel Group  (GII - Get Report) , which is set to release numbers on Tuesday before the market open. Wall Street analysts, on average, expect G-III Apparel Group to report revenue of $573.01 million on earnings of 44 cents per share.

The current short interest as a percentage of the float for G-III Apparel Group is notable at 7.9%. That means that out of 41.14 million shares in the tradable float, 3.26 million shares are sold short by the bear.

From a technical perspective, G-III Apparel Group 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 strong over the last three months, with shares moving higher off its new 52-week low of $39.50 a share to its intraday high on Monday of $55.89 a share. During that uptrend, shares of G-III Apparel Group 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.

If you're bullish on G-III Apparel Group, 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 $56.25 a share to its 200-day moving average of $58.01 a share with high volume. Look for volume on that move that hits near or above its three-month average volume of 408,361 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 $64 to $66, or even $69.26 a share.

I would simply avoid G-III Apparel Group 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 $53.22 a share to some more near-term support at $51.13 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 $48.92 a share to $47.26, or even $43.19 a share.

Sportsman's Warehouse

My final earnings short-squeeze trading opportunity is outdoor sporting goods retailer Sportsman's Warehouse  (SPWH - Get Report) , which is set to release numbers on Wednesday after the market close. Wall Street analysts, on average, expect Sportsman's Warehouse to report revenue of $206.21 million on earnings of 25 cents per share.

The current short interest as a percentage of the float for Sportsman's Warehouse is rather high at 10.3%. That means that out of the 24.97 million shares in the tradable float, 2.58 million shares are sold short by the bears.

From a technical perspective, Sportsman's Warehouse is currently trending above both its 50-day and 200-day moving averages, which is bullish. This stock has been uptrending a bit over the last two months, with shares moving higher off its low of $11.11 a share to its recent high of $13.51 a share. During that uptrend, shares of Sportsman's Warehouse 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 Sportsman's Warehouse, 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 resistance levels at $13.43 to $13.51 a share and then above more key resistance levels $13.78 to around $14 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 246,049 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 level at its 52-week high of $14.91 a share. Any high-volume move above $14.91 will then give this stock a chance to make a run at $18 to $20 a share.

I would avoid Sportsman's Warehouse 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 $13.06 a share to its 50-day moving average of $12.69 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 200-day moving average of $12.17 to $11.50, or even $11.11 to $10.90 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.