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.

Iconix Brand Group

My first earnings short-squeeze trade idea is brand management player Iconix Brand Group  (ICON - Get Report) , which is set to release numbers on Monday after the market close. Wall Street analysts, on average, expect Iconix Brand Group to report revenue of $93.33 million on earnings of 27 cents per share.

The current short interest as a percentage of the float for Iconix Brand Group is extremely high at 37.5%. That means that out of the 40.50 million shares in the tradable float, 15.19 million shares are sold short by the bears.

From a technical perspective, Iconix Brand 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 over the last three months and change, with shares moving higher off its new 52-week low of $4.67 a share to its recent high of $10.30 a share. During that uptrend, shares of Iconix Brand Group have been making mostly higher lows and higher highs, which is bullish technical price action. That said, this stock has pulled back off its recent high of $10.30 a share around $7.60 a share.

If you're bullish on Iconix Brand 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 $8 to its 20-day moving average of $8.45 a share and then above more key resistance levels at $9.50 to $9 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 2.20 million 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 $10 to $10.30 a share. Any high-volume move above those levels will then give this stock a chance to re-fill some of its previous gap-down-day zone from last November that started near $17 a share.

I would simply avoid Iconix Brand Group 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 $7.58 to its 50-day moving average of $7.43 a share and then below more key support at $7.28 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 $6.41 to $6.11, or even $5 a share.

Conn's

Another potential earnings short-squeeze trade idea is durable goods specialty retailer Conn's  (CONN - Get Report) , which is set to release numbers on Tuesday before the market open. Wall Street analysts, on average, expect Conn's to report revenue $455.78 million on earnings of 28 cents per share.

The current short interest as a percentage of the float for Conn's is extremely high at 33.3%. That means that out of the 21.47 million shares in the tradable float, 7.59 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 spark a monster short-squeeze for shares of Conn's post-earnings that sends the bears scrambling to cover some of their positions.

From a technical perspective, Conn's 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 $11.49 a share to its recent high of $21.48 a share. During that uptrend, shares of Conn's have been making mostly higher lows and higher highs, which is bullish technical price action. That said, this stock has now sold off notably off that recent high of $21.48 to its current level of around $16 a share.

If you're in the bull camp on Conn's, 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 $17 to its 20-day moving average of $17.34 a share and then above more key resistance levels at $17.53 to around $18.50 a share with high volume. Look for volume on that move that registers near or above its three-month average volume of 922,730 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 $20 to $21.50, or even $23 to $24 a share.

I would simply avoid Conn's 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 $15.66 to $14.73 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 $13 to $12.16 a share.

Restoration Hardware

Another potential earnings short-squeeze candidate is home furnishings retailer Restoration Hardware  (RH - Get Report) , which is set to release numbers on Tuesday after the market close. Wall Street analysts, on average, expect Restoration Hardware to report revenue $461.55 million on earnings of 17 cents per share.

The current short interest as a percentage of the float for Restoration Hardware is extremely high at 26.1%. That means that out of the 34.74 million shares in the tradable float, 8.28 million shares are sold short by the bears. If this company can product the earnings news the bulls are looking for, then shares of Restoration Hardware could easily rip sharply higher post-earnings as the bears move fast to cover some of their positions.

From a technical perspective, Restoration Hardware is currently trending above its 50-day and well below its 200-day moving averages, which is neutral trendwise. This stock has been consolidating and trending sideways over the last month, with shares moving between $35.03 on the downside and $41.10 on the upside. Any high-volume move post-earnings above the upper-end of its recent sideways trending chart pattern could easily trigger a major breakout trade for shares of Restoration Hardware.

If you're bullish on Restoration Hardware, 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 $38.90 to $40.40 a share and then above more resistance at $41.10 a share with high volume. Look for volume on that move that registers near or above its three-month average action of 2.20 million shares. If that breakout develops post-earnings, then this stock will set up to re-fill some of its previous gap-down-day zone from February that started near $52.50 a share.

I would avoid Restoration Hardware 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 $36.36 to its new 52-week low of $35.03 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.

Dave & Buster's Entertainment

Another earnings short-squeeze prospect is dining and entertainment player Dave & Buster's Entertainment  (PLAY - Get Report) , which is set to release numbers on Tuesday after the market close. Wall Street analysts, on average, expect Dave & Buster's Entertainment to report revenue of $229.36 million on earnings of 43 cents per share.

The current short interest as a percentage of the float for Dave & Buster's Entertainment is pretty high at 11.4%. That means that out of 31.78 million shares in the tradable float, 3.84 million shares are sold short by the bear. The bears have also been increasing their bets from the last reporting period by 28.4%, or by about 849,000 shares. If the bears get caught pressing their bets into a bullish quarter, then this stock could easily spike sharply higher post-earnings as the bears run to cover some of their positions.

From a technical perspective, Dave & Buster's Entertainment is currently trending above both its 50-day and 200-day moving averages, which is bullish. This stock has been uptrending strong over the last two months, with shares moving higher off its low of $29.54 a share to its recent high of $38.81 a share. During that uptrend, shares of Dave & Buster's Entertainment 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 Dave & Buster's Entertainment, 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 $38.81 to $40 a share with high volume. Look for volume on that move that hits near or above its three-month average volume of 572,712 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 $43.06 to its all-time high of $43.35 a share. Any high-volume move above those levels will then give this stock a chance to make a run at $50 a share.

I would simply avoid Dave & Buster's Entertainment 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 $37.44 a share to its 50-day moving average of $35.85 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 $33 to $32 a share.

Lennar

My final earnings short-squeeze trading opportunity is homebuilding player Lennar  (LEN - Get Report) , which is set to release numbers on Tuesday before the market open. Wall Street analysts, on average, expect Lennar to report revenue of $1.86 billion on earnings of 52 cents per share.

The current short interest as a percentage of the float for Lennar is rather high at 12.2%. That means that out of the 185.24 million shares in the tradable float, 21.92 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 19.8%, or by about 3.62 million shares. If the bears get caught pressing their bets into a strong quarter, then this stock could easily soar sharply higher post-earnings as the bears scramble to cover some of their positions.

From a technical perspective, Lennar is currently trending above its 50-day moving average and just a bit below its 200-day moving average, which is neutral trendwise. This stock has been uptrending strong over the last two months, with shares moving higher off its new 52-week low of $37.14 a share to its recent high of $48.24 a share. During that uptrend, shares of Lennar 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 Lennar, 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 resistance levels $48.24 to its 200-day moving average of $48.33 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 2.91 million 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 $50.74 to $52.43, or even its 52-week low high of $56.04 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 both its 20-day moving average of $45.70 a share to some more key support at $44 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 $42.66 to $40, or even $39 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.