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 to my subscribers in real-tie.

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.

GW Pharmaceuticals

My first earnings short-squeeze play is biopharmaceutical player GW Pharmaceuticals  (GWPH) , which is set to release numbers on Thursday before the market open. Wall Street analysts, on average, expect GW Pharmaceutical to report revenue $5.99 million on a loss of $1.57 per share.

The current short interest as a percentage of the float for GW Pharmaceuticals is pretty high at 12.9%. That means that out of the 20.31 million shares in the tradable float, 2.62 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 6.6%, or by about 161,00 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, GW Pharmaceuticals is currently trending above its 50-day moving average and below its 200-day moving average, which is neutral trendwise. This stock has been consolidating and trending sideways over the last month, with shares moving between $76.31 a share on the downside and $88.34 a share on the upside. Any high-volume move above the upper-end of its recent sideways trending chart pattern post-earnings could trigger a big breakout trade for shares of Twitter.

If you're bullish on GW Pharmaceuticals, 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 $85 to $88.34 a share and then above $88.41 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 737,734 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 $91.65 to $99.43, or even $98 to $100 a share.

I would simply avoid GW Pharmaceuticals 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 $76.31 to $75 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 $69.12 a share to its 50-day moving average of $69.52 a share.

Lannett

Another potential earnings short-squeeze trade idea is generic drug player Lannett  (LCI - Get Report) , which is set to release numbers on Tuesday after the market close. Wall Street analysts, on average, expect Lannett to report revenue $161.61 million on earnings of 63 cents per share.

The current short interest as a percentage of the float for Lannett is extremely high at 32.7%. That means that out of the 28.93 million shares in the tradable float, 9.48 million shares are sold short by the bears.

From a technical perspective, Lannett is currently trending below both its 50-day and 200-day moving averages, which is bearish. This stock has been consolidating over the last two months, with shares moving between $16.91 a share on the downside and $21.43 a share on the upside. Any high-volume move above the upper-end of its recent range post-earnings could trigger a big breakout trade for shares of Lannett.

If you're in the bull camp on Lannett, then I would wait until after its report and look for long-biased trades if this stock manages to break above its 20-day moving average of $19.08 a share and its 50-day moving average of $20.48 a share and then above more key resistance levels at $21.07 to $21.43 a share with high volume. Look for volume on that move that hits near or above its three-month average volume of 1.15 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 $26 to $27, or even $28 a share.

I would simply avoid Lannett 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 $17.91 to $17.05 a share and then below its new 52-week low of $16.91 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.

AAC Holdings

Another potential earnings short-squeeze candidate is specialized health services player AAC Holdings  (AAC - Get Report) , which is set to release numbers on Thursday before the market open. Wall Street analysts, on average, expect AAC Holdings to report revenue of $59.26 million on earnings of 15 cents per share.

The current short interest as a percentage of the float for AAC Holdings is extremely high at 73.7%. That means that out of the 6.78 million shares in the tradable float, 5 million shares are sold short by the bears. If the bulls get the earnings news they're looking for, then shares of AAC Holdings could easily spike sharply higher post-earnings as the bears move fast to cover some of their positions.

From a technical perspective, AAC Holdings 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, with shares moving higher off its low of $16.27 a share to its recent high of $21.69 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 AAC Holdings within range of triggering a breakout trade post-earnings.

If you're bullish on AAC Holdings, 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 $21.03 to $21.69 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 260,329 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 its 200-day moving average of $22.34 to $24.11, or even $25 to $26 a share.

I would avoid AAC Holdings 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 $19.66 a share to its 50-day moving average of $19.42 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 $17.69 to $16.27, or even its new 52-week low of $14.36 a share.

Iconix Brand Group

Another earnings short-squeeze prospect is brand management player Iconix Brand Group  (ICON - Get Report) , which is set to release numbers on Thursday before the market open. Wall Street analysts, on average, expect Iconix Brand Group to report revenue of $95.79 million on earnings of 41 cents per share.

The current short interest as a percentage of the float for Iconix Brand Group is extremely high at 30.2%. That means that out of 47.46 million shares in the tradable float, 14.35 million shares are sold short by the bear. If this company can deliver the earnings news the bulls are looking for, then shares of Iconix Brand Group could easily spike sharply higher post-earnings as the bear scramble to cover some of their positions.

From a technical perspective, Iconix Brand Group is currently trending below both its 50-day and 200-day moving averages, which is bearish. This stock has been uptrending over the last four months, with shares moving higher off its 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 move has now pushed this stock within range of triggering a big breakout trade post-earnings.

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 $9 to $9.27 a share and then above more key resistance at $10.30 to its 50-day moving average of $10.50 a share with high volume. Look for volume on that move that hits near or above its three-month average volume of 1.46 million shares. If that breakout triggers post-earnings, then this stock will set up 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 $7.75 to $7.31 a share and then below $7.11 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.

Shutterstock

My final earnings short-squeeze trading opportunity is business services Shutterstock  (SSTK - Get Report) , which is set to release numbers on Wednesday before the market open. Wall Street analysts, on average, expect Shutterstock to report revenue of $115.85 million on earnings of 29 cents per share.

The current short interest as a percentage of the float for Shutterstock is very high at 26.7%. That means that out of the 18.85 million shares in the tradable float, 5.03 million shares are sold short by the bears.

From a technical perspective, Shutterstock is currently trending above both its 50-day and 200-day moving averages, which is bullish. This stock has been uptrending over the last three months, with shares moving higher off its low of $25.71 a share to its recent high of $43.30 a share. During that uptrend, this stock has been consistently making higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of Shutterstock within range of triggering a major breakout trade post-earnings.

If you're in the bull camp on Shutterstock 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 at $42.50 to $43.30 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 330,650 shares. If that breakout triggers post-earnings, then this stock will set up to re-fill some of its previous gap-down-day zone from last August that started near $53 a share.

I would avoid Shutterstock 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 $40.05 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 $37.46 to $36, or even its 200-day moving average of $34.60 to $30 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.