5 Stocks Everyone Hates -- but You Should Love

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-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.

Lululemon Athletica

My first earnings short-squeeze play is athletic apparel player Lululemon Athletica  (LULU) , which is set to release numbers on Wednesday before the market open. Wall Street analysts, on average, expect Lululemon Athletica to report revenue $487.69 million on earnings of 31 cents per share.

The current short interest as a percentage of the float for Lululemon Athletica is very high at 19.3%. That means that out of the 107.14 million shares in the tradable float, 20.71 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 2%, or by about 396,000 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, Lululemon Athletica 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 month, with shares moving higher off its low of $59.67 a share to its intraday high on Monday of $68 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 Lululemon Athletica within range of triggering a big breakout trade post-earnings.

If you're bullish on Lululemon Athletica, 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 $69.73 to $70 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 2.05 million shares. If that breakout gets set off post-earnings, then this stock will set up to re-test or possibly take out its next major overhead resistance levels at $77.75 to $82.50 a share.

I would simply avoid Lululemon Athletica 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 $54.46 a share and its 20-day moving average of $53.41 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 $59.67 to its 200-day moving average of $57.65, or even $54 a share.

Navistar International

Another potential earnings short-squeeze trade idea is heavy machinery and vehicles player Navistar International  (NAV) , which is set to release numbers on Tuesday before the market open. Wall Street analysts, on average, expect Navistar International to report revenue $2.18 billion on a loss of 16 cents per share.

The current short interest as a percentage of the float for Navistar International is very high at 23.7%. That means that out of the 48.37 million shares in the tradable float, 11.46 million shares are sold short by the bears. If this company can produce the earnings news the bulls are looking for, then shares of Navistar International could easily spike sharply higher post-earnings as the bears rush to cover some of their trades.

From a technical perspective, Navistar International is currently trending above its 200-day moving average and just below its 50-day moving average, which is neutral trendwise. This stock recently formed a double bottom chart pattern, after shares found some buying interest at $10.30 to $10.57 a share. Following that potential bottom, shares of Navistar International have now started to uptrend move back above both its 200-day and 20-day moving averages. That move is quickly pushing this stock within range of triggering a big breakout trade post-earnings.

If you're in the bull camp on Navistar International, then I would wait until after its report and look for long-biased trades if this stock manages to break above its 50-day moving average of $12.38 a share and then above more key resistance at $12.76 a share with high volume. Look for volume on that move that hits near or above its three-month average volume of 1.24 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 $15 to $16.39, or even $16.62 to $17.50 a share.

I would simply avoid Navistar International 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 $11.31 a share to some more key support levels at $10.57 to $10.30 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 $8.50 to $8, or even $7 a share.

Hooker Furniture

Another potential earnings short-squeeze candidate is home furnishings and fixtures player Hooker Furniture  (HOFT) , which is set to release numbers on Tuesday before the market open. Wall Street analysts, on average, expect Hooker Furniture to report revenue of $124.80 million on earnings of 46 cents per share.

The current short interest as a percentage of the float for Hooker Furniture stands at 5%. That means that out of the 10.22 million shares in the tradable float, 501,500 shares are sold short by the bears.

From a technical perspective, Hooker Furniture is currently trending below both its 50-day and 200-day moving averages, which is bearish. This stock has been consolidating and trending sideways over the last two months, with shares moving between $23.45 a share on the downside and around $26 a share 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 Hooker Furniture.

If you're bullish on Hooker Furniture, 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 $25 to $25.45 a share and then above both its 50-day moving average of $26.16 a share to its 200-day moving average of $26.76 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 85,013 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 $28 to $30, or even its gap-down-day high from April at $32 a share.

I would avoid Hooker Furniture 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 $23.45 a share to its 52-week low of $22.16 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 $21.92 to $18 a share.

Layne Christensen

Another earnings short-squeeze prospect is heavy construction player Layne Christensen  (LAYN) , which is set to release numbers on Monday after the market close. Wall Street analysts, on average, expect Layne Christensen to report revenue of $160.24 million on a loss of 31 cents per share.

The current short interest as a percentage of the float for Layne Christensen is very high at 18.5%. That means that out of 15.64 million shares in the tradable float, 2.89 million shares are sold short by the bear. The bears have also been increasing their bets from the last reporting period by 9.9%, or by about 260,000 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 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 six months, with shares moving higher off its low $3.75 a share to its recent high of $9.32 a share. During that uptrend, shares of Layne Christensen 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 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 near-term overhead resistance levels at $9.20 to $9.32 a share and then once it clears more key resistance levels at $10 to $10.50 a share with high volume. Look for volume on that move that hits near or above its three-month average volume of 142,597 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 $12 to $14 a share.

I would simply avoid Layne Christensen 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 50-day moving average of $8.29 a share to $7.90 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 $7 to its 200-day moving average of $6.59 a share.

Dave & Buster's Entertainment

My final earnings short-squeeze trading opportunity is entertainment and dining venues operator Dave & Buster's Entertainment  (PLAY) , 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 $251.42 million on earnings of 59 cents per share.

The current short interest as a percentage of the float for Dave & Buster's Entertainment is very high at 14.5%. That means that out of the 3.56 million shares in the tradable float, 517,500 shares are sold short by the bears.

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 over the last month, with shares moving higher off its low of $36.83 a share to its recent high of $41.40 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 in the bull camp 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 $42.12 to $43.06 a share and then once it clears its all-time high of $43.35 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 625,233 shares. If that breakout fires off post-earnings, then this stock will set up to enter new all-time-high territory, which is bullish technical price action.

I would 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 some near-term support levels at its 50-day moving average of $39.46 a share to its 20-day moving average of $39.13 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 200-day moving average of $38.32 a share to $36.93, or even $35 to $33 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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