5 Hated Stocks 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.

Conn's

My first earnings short-squeeze trade idea is specialty retailer Conn's  (CONN) , which is set to release numbers on Thursday before the market open. Wall Street analysts, on average, expect Conn's to report revenue of $413.12 million on a loss of 7 cents per share.

The current short interest as a percentage of the float for Conn's is extremely high at 33%. That means that out of the 18.84 million shares in the tradable float, 6.22 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 4.2%, or by about 252,000 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 run to cover some of their positions.

From a technical perspective, Conn's is currently trending below both its 50-day and 200-day moving averages, which is bearish. This stock recently formed a double bottom chart pattern, after shares found some buying interest at $6.55 to $6.54 a share over the last month and change. Following that potential bottom, this stock has started to trend modestly higher and briefly trade back above its 20-day moving average of $6.83 a share. Shares of Conn's are now starting to trend within range of triggering a big breakout trade post-earnings above some key overhead resistance levels.

If you're bullish 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 at $6.92 to $7.20 a share and then above more key 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 654,535 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 $8.60 to $9.24, or even $10 to $11 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 its new 52-week low of $6.54 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 potential earnings short-squeeze play 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 $243.14 million on earnings of 44 cents per share.

The current short interest as a percentage of the float for Dave & Buster's Entertainment is pretty high at 12.1%. That means that out of the 38.47 million shares in the tradable float, 4.67 million 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 and change, with shares moving higher off its low of $40.95 a share to its intraday high on Tuesday of $47.30 a share. During that uptrend, shares of Dave & Buster's Entertainment have been consistently making 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 above some near-term overhead resistance levels at $49 to $49 a share and then above its all-time high of $49.90 a share with high volume. Look for volume on that move that hits near or above its three-month average volume of 962,866 shares. If that breakout develops post-earnings, then this stock will set up to enter new all-time-high territory, which is bullish technical price action. Some possible upside targets off that move are $55 to $60, or even $65 to $70 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 both its 50-day moving average of $45.64 a share and its 20-day moving average of $44.95 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 $43.15 to $40.95, or even its 200-day moving average of $40.67 to $37 a share.

Restoration Hardware

Another potential earnings short-squeeze candidate is home furnishing stores operator Restoration Hardware  (RH) , which is set to release numbers on Thursday after the market close. Wall Street analysts, on average, expect Restoration Hardware to report revenue of $511.77 million on earnings of 29 cents per share.

The current short interest as a percentage of the float for Restoration Hardware is extremely high at 27.9%. That means that out of the 38.17 million shares in the tradable float, 10.68 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 8.7%, or by about 853,000 shares. If the bears get caught pressing their bets into a bullish quarter, then this stock could easily trend sharply higher post-earnings as the bears scramble to cover some of their positions.

From a technical perspective, Restoration Hardware 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 three months, with shares moving higher off its new 52-week low of $24.75 a share to its recent high of $35.95 a share. During that uptrend, shares of Restoration Hardware have been making mostly 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.

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 $35 to $35.95 a share and then above more resistance at $36.65 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 3.11 million 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 $40 to $43, or even its 200-day moving average of $46.62 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 near-term support levels at its 20-day moving average of $32.65 a share to more support at $31.82 a share and its 50-day moving average of $30.63 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 $29.65 to $29, or even $27.20 to $25 a share.

Zumiez

Another earnings short-squeeze prospect is specialty apparel, footwear and accessories retailer Zumiez  (ZUMZ) , which is set to release numbers on Thursday after the market close. Wall Street analysts, on average, expect Zumiez to report revenue of $177.35 million on a loss of 8 cents per share.

The current short interest as a percentage of the float for Zumiez is very high at 26.3%. That means that out of 17.44 million shares in the tradable float, 4.59 million shares are sold short by the bear. The bears have also been increasing their bets from the last reporting period by 10.1%, or by about 422,000 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 move fast to cover some of their positions.

From a technical perspective, Zumiez is currently trending above its 50-day moving average and just below its 200-day moving average, which is neutral trendwise. This stock recently started to spike a bit higher off its 50-day moving average of $16.10 a share and off some near-term support at $16.01 a share. That small spike to the upside is now starting to push shares of Zumiez within range of triggering a big breakout trade post-earnings.

If you're bullish on Zumiez, then I would wait until after its report and look for long-biased trades if this stock manages to break out above its 200-day moving average of $16.78 a share and then above more key overhead resistance levels at $17.48 to $18 a share and above $18.50 a share with high volume. Look for volume on that move that hits near or above its three-month average volume of 503,182 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 $21 to $22, or even $24 to $28 a share.

I would simply avoid Zumiez or look for short-biased trades if after earnings it fails to trigger that breakout and then drops back below its 50-day moving average of $16.10 a share and below near-term support at $16.01 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 $14.42 to $13.63, or even $13.50 a share.

Layne Christensen

My final earnings short-squeeze trading opportunity 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 $164.19 million on a loss of 20 cents per share.

The current short interest as a percentage of the float for Layne Christensen is extremely high at 21.4%. That means that out of the 17.77 million shares in the tradable float, 3.81 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 2.3%, or by about 86,000 shares. If the bears get caught pressing their bets into a strong quarter, then this stock could easily spike sharply higher post-earnings as the bears rush to cover some of their trades.

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 two months, with shares moving higher off its low of $6.50 share to its recent high of $9.56 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 in the bull camp 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 near-term overhead resistance levels at $9.35 to its 52-week high of $9.56 a share and then above some past resistance at $10.51 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 175,492 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 $12 to $14 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 some near-term support levels at $8.69 a share to its 50-day moving average of $8.56 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 $7.63 to its 200-day moving average of $7.12 a share, or even $6.50 a share.

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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