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.

MSC Industrial Direct

My first earnings short-squeeze trade idea is industrial equipment wholesale player MSC Industrial Direct  (MSM - Get Report) , which is set to release numbers on Wednesday before the market open. Wall Street analysts, on average, expect MSC Industrial Direct to report revenue of $684.94 million on earnings of 93 cents per share.

The current short interest as a percentage of the float for MSC Industrial Direct is notable at 6.2%. That means that out of the 43.27 million shares in the tradable float, 2.70 million shares are sold short by the bears.

From a technical perspective, MSC Industrial Direct is currently trending above both its 50-day and 200-day moving averages, which is bullish. This stock has been consolidating and trending sideways over the last month and change, with shares moving between $94.64 a share on the upside and $90.59 a share on the downside. 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 MSC Industrial Direct.

If you're bullish on MSC Industrial Direct , 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 $92.48 a share and then above more near-term overhead resistance levels at $93.63 to $94.64 a share with high volume. Look for volume on that move that registers near or above its three-month average action of 689,506 shares. If that breakout hits post-earnings, then this stock will set up to make a run at $100 to $105, or even $110 a share.

I would simply avoid MSC Industrial Direct 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 $91 to $90.59 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 $88 to its 50-day moving average of $86.45 a share, or even $82 to $80 a share.

MTS Systems

Another potential earnings short-squeeze play is test systems and position sensors supplier MTS Systems  (MTSC - Get Report) , which is set to release numbers on Wednesday after the market close. Wall Street analysts, on average, expect MTS Systems to report revenue of $204.78 million on earnings of 67 cents per share.

The current short interest as a percentage of the float for MTS Systems stands at 7.2%. That means that out of the 16.56 million shares in the tradable float, 1.19 million shares are sold short by the bears.

From a technical perspective, MTS Systems 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 three months, with shares moving higher off its low of $41.31 a share to its recent high of $57.80 a share. During that uptrend, this stock has been making mostly higher lows and higher highs, which is bullish technical price action. This uptrend is now quickly pushing shares of MTS Systems within range of triggering a big breakout trade post-earnings above some key overhead resistance levels.

If you're in the bull camp on MTS 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 $57.80 to $59 a share with high volume. Look for volume on that move that hits near or above its three-month average volume of 121,095 shares. If that breakout kicks off post-earnings, then this stock will set up to re-test or possibly take out its next major overhead resistance levels at $61 to $63, or even $66.30 to $70 a share.

I would simply avoid MTS Systems 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 $56.52 a share to more support at $55 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 $53.28 a share to $51, or even its 200-day moving average of $49.29 a share.

WD-40 Company

Another potential earnings short-squeeze candidate is maintenance and cleaning products developer WD-40 Company  (WDFC - Get Report) , which is set to release numbers on Monday after the market close. Wall Street analysts, on average, expect WD-40 Company to report revenue of $96.31 million on earnings of 87 cents per share.

The current short interest as a percentage of the float for WD-40 Company is pretty high at 10.4%. That means that out of the 13.71 million shares in the tradable float, 1.42 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 11.3%, or by about 144,000 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, WD-40 Company is currently trending above both its 50-day and 200-day moving averages, which is bullish. This stock has been uptrending over the last two months, with shares moving higher off its low of $101.35 a share to its recent high of $119.90 a share. During that uptrend, shares of WD-40 have been making mostly higher lows and higher highs, which is bullish technical price action. That strong move to the upside has now pushed this stock within range of triggering a near-term breakout trade post-earnings above some key overhead resistance levels.

If you're bullish on WD-40 Company, 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 $119.90 to $120.63 a share with high volume. Look for volume on that move that registers near or above its three-month average action of 97,025 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 $124.09 to its 52-week high of $125, or even $130 to $135 a share.

I would avoid WD-40 Company 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 $116 to its 20-day moving average of $114.94 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 $111.35 a share to its 50-day moving average of $110.55 a share, or even $109 to $106 a share.

Supervalu

Another earnings short-squeeze prospect is grocery stores player Supervalu  (SVU) , which is set to release numbers on Wednesday before the market open. Wall Street analysts, on average, expect Supervalu to report revenue of $3.93 billion on earnings of 14 cents per share.

The current short interest as a percentage of the float for Supervalu sits at 4.8%. That means that out of 222.33 million shares in the tradable float, 10.73 million shares are sold short by the bears.

From a technical perspective, Supervalu is currently trending below both its 50-day and 200-day moving averages, which is bearish. his stock has been downtrending over the last month, with shares moving lower off its high of $5.13 a share to its intraday low on Monday of $4.55 a share. During that downtrend, shares of Supervalu have been making mostly lower highs and lower lows, which is bearish technical price action.

If you're bullish on Supervalu, then I would wait until after its report and look for long-biased trades if this stock manages to break out above both its 20-day moving average of $4.85 a share and its 200-day moving average of $4.91 a share and then above more resistance at $4.97 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 3.49 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 $5.13 to $5.24, or even $5.50 to $5.75 a share.

I would simply avoid Supervalu 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 $4.55 to $4.47 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 $4.08 to its 52-week low of $3.94 a share. Any high-volume move below $3.94 will then push this stock into new 52-week-low territory, which is bearish technical price action.

KB Home

My final earnings short-squeeze trading opportunity is homebuilding player KB Home  (KBH - Get Report) , which is set to release numbers on Wednesday after the market close. Wall Street analysts, on average, expect KB Home to report revenue of $1.14 billion on earnings of 37 cents per share.

The current short interest as a percentage of the float for KB Home is extremely high at 21.7%. That means that out of the 68.03 million shares in the tradable float, 14.79 million shares are sold short by the bears.

From a technical perspective, KB Home 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 two months and change, with shares moving higher off its low of $14.06 a share to its recent high of $17.38 a share. During that uptrend, shares of KB Home have been making mostly higher lows and higher highs, which is bullish technical price action. That move to the upside is now starting to push this stock within range of triggering a big breakout trade post-earnings above some key overhead resistance levels.

If you're in the bull camp on KB Home then I would wait until after its report and look for long-biased trades if this stock manages to break out above its 52-week high of $17.38 a share to some past resistance levels at $17.84 to $18.65 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 materializes 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 breakout are $20.40 to $22, or even $23 to $24 a share.

I would avoid KB Home 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 $15.77 to its 50-day moving average of $15.74 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 $15.09 a share to $14.20, or even $14.06 to $13 a share.

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.