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.

Veeva Systems

My first earnings short-squeeze play is healthcare information services player Veeva Systems  (VEEV) , which is set to release numbers on Tuesday after the market close. Wall Street analysts, on average, expect Veeva Systems to report revenue of $135.67 million on earnings of 16 cents per share.

The current short interest as a percentage of the float for Veeva Systems is notable at 7.5%. That means that out of the 92.34 million shares in the tradable float, 6.97 million shares are sold short by the bears.

From a technical perspective, Veeva Systems 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 $37.34 a share to its recent high of $42.10 a share. During that uptrend, shares of Veeva Systems 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 above some key overhead resistance levels.

If you're bullish on Veeva Systems, 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 $42.10 to $42.24 a share and then above its 52-week high of $42.58 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 1.32 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 $44.30 to its all-time high of $49 a share. Any high-volume move above $49 will then push shares of Veeva Systems into new all-time-high territory, which is bullish technical price action.

I would simply avoid Veeva Systems 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 $39.70 a share and its 20-day moving average of $39.46 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 $37.34 to $36.55, or even its 200-day moving average of $33.44 a share.

Ctrip.com International

Another potential earnings short-squeeze play is China-based travel services player Ctrip.com International  (CTRP) , which is set to release numbers on Wednesday after the market close. Wall Street analysts, on average, expect Ctrip.com International to report revenue of $810.87 million on a loss of 8 cents per share.

The current short interest as a percentage of the float for Ctrip.com International is pretty high at 10.1%. That means that out of the 346.95 million shares in the tradable float, 35.18 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 4%, or by about 1.34 million shares. If the bears get caught pressing their bets into a bullish 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, Ctrip.com International is currently trending below both its 50-day and 200-day moving averages, which is bearish. This stock has been downtrending over the last month and change, with shares moving lower off its high of $49.62 a share to its recent low of $40.02 a share. During that downtrend, shares of Ctrip.com have been making mostly lower highs and lower lows, which is bearish technical price action.

If you're in the bull camp on Ctrip.com International, 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 $42.82 a share to $44.05, and then above its 50-day moving average of $44.92 a share with high volume. Look for volume on that move that registers near or above its three-month average volume of 4.50 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 $47 to $48, or even $49.60 to its 52-week high of $55.60 a share.

I would simply avoid Ctrip.com International 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 $41 to $40.02 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 $37.40 to its 52-week low of $35.50, or even $30 a share.

Nimble Storage

Another potential earnings short-squeeze candidate is flash storage platforms provider Nimble Storage  (NMBL) , which is set to release numbers on Tuesday after the market close Wall Street analysts, on average, expect Nimble Storage to report revenue of $101.99 million on a loss of 18 cents per share.

The current short interest as a percentage of the float for Nimble Storage is notable at 7.2%. That means that out of the 59.19 million shares in the tradable float, 4.26 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 2.8%, or by about 114,000 shares. If the bears get caught pressing their bets into a strong quarter, then this stock could easily rip sharply higher post-earnings as the bears move fast to cover some of their trades.

From a technical perspective, Nimble Storage 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 recent low of $7.11 a share to its high of $9.45 a share. During that uptrend, shares of Nimble Storage 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 Nimble Storage, 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 $9.45 to $9.90 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 1.10 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 level at its 52-week high of $11.33 a share. Any high-volume move above $11.33 to $12 will then give this stock a chance to re-fill some of its previous gap-down-day zone from November of 2015 that started near $20 a share.

I would avoid Nimble Storage 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 at $8.60 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 level at its 50-day moving average of $8.13 a share to its 200-day moving average of $7.80 a share, or even $7.40 to $7.11 a share.

Urban Outfitters

Another earnings short-squeeze prospect is lifestyle specialty retailer Urban Outfitters (URBN), which is set to release numbers on Tuesday after the market close. Wall Street analysts, on average, expect Urban Outfitters to report revenue of $869.07 million on earnings of 44 cents per share.

The current short interest as a percentage of the float for Urban Outfitters is very high at 14.8%. That means that out of 89.20 million shares in the tradable float, 13.23 million shares are sold short by the bear. The bears have also been increasing their bets from the last reporting period by 11.7%, or by about 1.38 million shares. If the bears get caught pressing their bets into a bullish quarter, then this stock could easily jump sharply higher post-earnings as the bears rush to cover some of their positions.

From a technical perspective, Urban Outfitters 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 $32.04 a share to its recent high of $40.80 a share. During that uptrend, shares of Urban Outfitters has 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 above some key overhead resistance levels.

If you're bullish on Urban Outfitters, 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 $39 to $40 a share and then above its 52-week high of $40.80 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 2.23 million shares. If that breakout develops post-earnings, then this stock will set up to enter new 52-week-high territory, which is bullish technical price action. Some possible upside targets off that move are $45 to $50 a share.

I would simply avoid Urban Outfitters or look for short-biased trades if after earnings it fails to trigger that breakout and then drops back below some near-term support at $37.10 a share and then below both its 20-day moving average of $35.51 a share and its 50-day moving average of $35.29 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 $32.04 to its 200-day moving average of $31.37 a share, or even $30 to $28 a share.

Zhaopin

My final earnings short-squeeze trading opportunity is China-based online recruitment platform operator Zhaopin (ZPIN), which is set to release numbers on Wednesday after the market close. Wall Street analysts, on average, expect Zhaopin to report revenue of $56.72 million.

The current short interest as a percentage of the float for Zhaopin sits at 2.3%. That means that out of the 4.04 million shares in the tradable float, 64,000 shares are sold short by the bears.

From a technical perspective, Zhaopin is currently trending below both its 50-day and 200-day moving averages, which is bearish. This stock has been downtrending over the last two months, with shares moving lower off its high of $16 a share to its new 52-week low of $13.70 a share. During that downtrend, shares of Zhaopin have been making mostly lower highs and lower lows, which is bearish technical price action.

If you're in the bull camp on Zhaopin 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 $14.56 to $14.82 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 35,182 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 its 200-day moving average of $15.17 a share to $15.67, or even $16 to its 52-week high of $16.90 a share.

I would avoid Zhaopin 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 $13.70 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. Some possible downside targets off that move are $12.50 to $12, or even $11.65 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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