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.

Short-squeeze candidates are something that I tweet about on a regular basis. These are also the exact type of stocks that I love to trade and alert in real-time.

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.

DavidsTea

My first earnings short-squeeze trade idea is beverage player DavidsTea  (DTEA) , which is set to release numbers on Tuesday after the market close. Wall Street analysts, on average, expect DavidsTea to report revenue $71.74 million on earnings of 43 cents per share.

The current short interest as a percentage of the float for DavidsTea is very high at 19%. That means that out of the 7 million shares in the tradable float, 1.75 million shares are sold short by the bears. If this company can produce the earnings news the bulls are looking for, then shares of DavidsTea can rip sharply higher post-earnings as the bears move fast to cover some of their positions.

From a technical perspective, DavidsTea 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 two months and change, with shares moving higher off its new 52-week low of $8.88 a share to its recent high of $12.27 a share. During that uptrend, this stock has been making mostly higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of DavidsTea within range of triggering a big breakout trade post-earnings.

If you're bullish on DavidsTea, 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 $12.11 to $12.27 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 74,287 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 $13.49 to its 200-day moving average of $13.54, or even $15 to $16 a share.

I would simply avoid DavidsTea 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 its 20-day moving average of $11.87 a share to $11.10 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 $10.72 to $10.70, or even $9.50 to $9 a share.

Titan Machinery

Another potential earnings short-squeeze play is agricultural and construction equipment player Titan Machinery  (TITN) , which is set to release numbers on Wednesday before the market open. Wall Street analysts, on average, expect Titan Machinery to report revenue $291.93 million on a loss of 14 cents per share.

The current short interest as a percentage of the float for Titan Machinery is very high at 19.4%. That means that out of the 16.99 million shares in the tradable float, 3.29 million shares are sold short by the bears. This stock currently sports a high short interest and a very low tradable float. Any bullish earnings news could easily trigger a monster short-squeeze for shares of Titan Machinery post-earnings that forces the bears to cover some of their positions.

From a technical perspective, Titan Machinery is currently trending above both its 50-day moving average and below its 200-day moving average, which is neutral trendwise. This stock recently formed a double bottom chart pattern, after shares found some buying interest over the last month at $10.85 to $10.84 a share. Following that potential bottom, shares of Titan Machinery have to spike higher and move within range of triggering a near-term breakout trade post-earnings.

If you're in the bull camp on Titan Machinery, 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 $11.53 a share to its 200-day moving average of $11.75 a share and then above more resistance at $12 a share with high volume. Look for volume on that move that hits near or above its three-month average volume of 201,848 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 $13.12 to $13.50, or even $14.40 to $15 a share.

I would simply avoid Titan Machinery 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 $10.84 to its 50-day moving average of $10.33 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 $9 to around $8.50 a share.

Layne Christensen

Another potential earnings short-squeeze candidate is heavy construction player Layne Christensen  (LAYN) , which is set to release numbers on Tuesday after the market close. Wall Street analysts, on average, expect Layne Christensen to report revenue of $156.10 million on a loss of 38 cents per share.

The current short interest as a percentage of the float for Layne Christensen is very high at 18.9%. That means that out of the 14.60 million shares in the tradable float, 2.76 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 4.4%, or by about 121,000 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 bears scramble to cover some of their positions.

From a technical perspective, Layne Christensen 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 five months, with shares moving higher off its 52-week low of $3.75 a share to its recent high of $7.24 a share. During that uptrend, this stock has been making mostly higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of Layne Christensen within range of triggering a near-term breakout trade post-earnings.

If you're bullish on Layne Christensen, then I would wait until after its report and look for long-biased trades if this stock manages to break out above some key overhead resistance levels at $7.24 to $7.29 a share and then above more resistance at $7.70 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 134,715 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 $9 to $9.40, or even $10 to $10.50 a share.

I would avoid Layne Christensen or look for short-biased trades if after earnings it fails to trigger that breakout and then drops back below both its 200-day moving average of $6.56 a share to its 50-day moving average of $6.34 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 $5.66 to $5 a share.

Pier 1 Imports

Another earnings short-squeeze prospect is decorative home furnishings and furniture specialty retailer Pier 1 Imports  (PIR) , which is set to release numbers on Wednesday after the market close. Wall Street analysts, on average, expect Pier 1 Imports to report revenue of $524.13 million on earnings of 21 cents per share.

The current short interest as a percentage of the float for Pier 1 Imports is rather high at 13.5%. That means that out of 79.88 million shares in the tradable float, 10.79 million shares are sold short by the bear. The bears have also been increasing their bets from the last reporting period by 1.5%, or by about 157,000 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 trades.

From a technical perspective, Pier 1 Imports is currently trending above its 50-day moving average and below its 200-day moving average, which is neutral trendwise. This stock has recently formed a triple bottom chart pattern, after shares found some buying interest over the last month and change at $6.20, $6.05 and $6.26 a share. Following that potential bottom, shares of Pier 1 Imports have now started to spike higher and it's beginning to move within range of triggering a near-term breakout trade post-earnings.

If you're bullish on Pier1 Imports, 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 to $7.06 a share with high volume. Look for volume on that move that hits near or above its three-month average volume of 1.54 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 $7.55 to $8.09, or even $9.50 to $10 a share.

I would simply avoid Pier 1 Imports 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 $6.26 to $6.05 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 $5.59 to $5, or even $4.60 a share.

Chemical Financial

My final earnings short-squeeze trading opportunity is regional banking player Chemical Financial  (CHFC) , which is set to release numbers on Friday after the market close. Wall Street analysts, on average, expect Chemical Financial to report revenue of $95.90 million on earnings of 63 per share.

The current short interest as a percentage of the float for Chemical Financial is notable at 7.2%. That means that out of the 37.55 million shares in the tradable float, 2.73 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 8.9%, or by about 243,000 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 bears rush to cover some of their positions.

From a technical perspective, Chemical Financial is currently trending above its 50-day and 200-day moving averages, which is bullish. This stock has been uptrending over the last two months and change, with shares moving higher off its low of $29.18 a share to its recent high of $36.45 a share. During that uptrend, shares of Chemical Financial 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 Chemical Financial, 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 overhead resistance levels at $36.45 to $36.72 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 305,213 shares. If that breakout fires off post-earnings, then this stock will set up to make a run at $40 to $45, or even $50 a share.

I would avoid Chemical Financial 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 $34.14 a share to its 200-day moving average of $34.14 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 $31 to $29.77, or even $29.18 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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