5 Earnings Short-Squeeze Plays

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.

Zoe's Kitchen

My first earnings short-squeeze trade idea is fast-casual restaurant operator Zoe's Kitchen (ZOES) , which is set to release numbers on Monday after the market close. Wall Street analysts, on average, expect Zoe's Kitchen to report revenue of $68.04 million on earnings of 4 cents per share.

The current short interest as a percentage of the float for Zoe's Kitchen is extremely high at 34.8%. That means that out of the 19.05 million shares in the tradable float, 6.64 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 1.7%, or by about 110,000 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 scramble to cover some of their positions.

From a technical perspective, Zoe's Kitchen 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 over the last few weeks, with shares moving higher off its new 52-week low of $20.20 a share to its intraday high on Monday of $25.11 a share. During that uptrend, shares of Zoe's Kitchen have been making mostly higher lows and higher highs, which is bullish technical price action. That move has also pushed this stock back above both its 20-day and 50-day moving averages.

If you're bullish on Zoe's Kitchen, then I would wait until after its report and look for long-biased trades if this stock manages to break out above Monday's intraday high of $25.11 a share to some more near-term resistance at $25.68 a share with high volume. Look for volume on that move that registers near or above its three-month average action of 747,520 shares. If that breakout triggers post-earnings, then this stock will set up to retest or possibly take out its next major overhead resistance levels at $29.50 to $30, or even $32 a share.

I would simply avoid Zoe's Kitchen 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 $23.06 a share to its 20-day moving average of $22.32 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 to its new 52-week low of $20.20 a share. Any high-volume move below $20.20 will then push this stock into new 52-week-low territory, which is bearish technical price action.

Noah Holdings

Another potential earnings short-squeeze play is China-based wealth management services provider Noah Holdings (NOAH) , which is set to release numbers on Monday after the market close. There are currently no analysts' estimates amiable for this company.

The current short interest as a percentage of the float for Noah Holdings is very high at 17.9%. That means that out of the 20.60 million shares in the tradable float, 3.70 million shares are sold short by the bears.

From a technical perspective, Noah Holdings is currently trending below both its 50-day and 200-day moving averages, which is bearish. This stock has been uptrending over the last few weeks, with shares moving higher off its low of $22.20 a share to its intraday high on Monday of $25.26 a share. During that uptrend, shares of Noah Holdings have been consistently making higher lows and higher highs, which is bullish technical price action. That move has how pushed this stock within range of triggering a big breakout trade post-earnings.

If you're in the bull camp on Noah Holdings, then I would wait until after its report and look for long-biased trades if this stock manages to break out above its 50-day moving average of $25.52 a share to $25.88 a share and then above more key resistance levels at $27 to $27.43 a share with high volume. Look for volume on that move that hits near or above its three-month average volume of 141,051 shares. If that breakout fires off post-earnings, then this stock will set up to retest or possibly take out its next major overhead resistance levels at $29.35 to $31.15, or even its 52-week high of $33.55 a share.

I would simply avoid Noah Holdings 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 $24.18 a share with high volume. If we get that move, then this stock will set up to retest or possibly take out its next major support levels at $22.20 to $21.90, or even its 52-week low of $20.30 a share.

eHi Car Services

Another potential earnings short-squeeze candidate is China-based car rentals and car services provider eHi Car Services (EHIC) , which is set to release numbers on Wednesday before the market open. Wall Street analysts, on average, expect eHi Car Services to report revenue of $71.42 million.

The current short interest as a percentage of the float for eHi Car Services is pretty high at 12.3%. That means that out of the 9.75 million shares in the tradable float, 1.20 million shares are sold short by the bears.

From a technical perspective, eHi Car Services is currently trending below both its 50-day and 200-day moving averages, which is bearish. This stock has been trending sideways and consolidating over the last two months and change, with shares moving between $9.90 on the downside and $11 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 eHi Car Services.

If you're bullish on eHi Car Services, then I would wait until after its report and look for long-biased trades if this stock manages to break out above its 50-day moving average of $10.35 a share and its 200-day moving average of $10.82 a share and then above more key resistance levels at $10.90 to $11 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 66,655 shares. If that breakout materializes post-earnings, then this stock will set up to retest or possibly take out its next major overhead resistance levels at $11.80 to $12.43, or even $13.92 to its 52-week high of $14.88 a share.

I would avoid eHi Car Services 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 $9.90 to its new 52-week low of $9.40 a share with high volume. If we get that move, then this stock will set up to retest or possibly take out its next major support levels at $8.50 to $8 a share.

Mobileye

Another earnings short-squeeze prospect is application software player Mobileye (MBLY) , which is set to release numbers on Tuesday before the market open. Wall Street analysts, on average, expect Mobileye to report revenue of $89.51 million on earnings of 18 cents per share.

The current short interest as a percentage of the float for Mobileye is very high at 16.3%. That means that out of 159.75 million shares in the tradable float, 26.10 million shares are sold short by the bears.

From a technical perspective, Mobileye 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 at $36.15 to $36.70 a share. Following that potential bottom, shares of Mobileye have now started to uptrend a bit, with shares moving higher off that $36.15 low to its intraday high on Monday of $41.08 a share. That uptrend is now quickly pushing this stock within range of triggering a big breakout trade post-earnings.

If you're bullish on Mobileye, 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 $43.20 to $44.06 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 2.86 million shares. If that breakout develops post-earnings, then this stock will set up to retest or possibly take out its next major overhead resistance levels at $50 to its 52-week high of $51.15 a share.

I would simply avoid Mobileye 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 $37.75 a share to some more near-term support at $36.15 a share with high volume. If we get that move, then this stock will set up to retest or possibly take out its next major support levels at $33.93 to $32.46, or even $30 to $29 a share.

Macom Technology Solutions

My final earnings short-squeeze trading opportunity is semiconductor player Macom Technology Solutions (MTSI) , which is set to release numbers on Tuesday after the market close. Wall Street analysts, on average, expect Macom to report revenue of $149.97 million on earnings of 56 cents per share.

The current short interest as a percentage of the float for Macom is very high at 18.3%. That means that out of the 33 million shares in the tradable float, 6.06 million shares are sold short by the bears.

From a technical perspective, Macom is currently trending above both its 50-day and 200-day moving averages, which is bullish. This stock has been uptrending over the last few weeks, with shares moving higher off its low of $35.33 a share to its intraday high on Monday of $41.82 a share. During that uptrend, shares of Macom 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 Macom, 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 $43.90 to $44.16 a share and then above its all-time high of $45.46 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 391,928 shares. If that breakout takes hold 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 $50 to $55, or even $60 to $65 a share.

I would avoid Macom 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 $40.11 a share to its 20-day moving average of $38.17 a share and then below more key support at $37 a share with high volume. If we get that move, then this stock will set up to retest or possibly take out its next major support levels of $35.33 to $34, or even $32 to $30.60 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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