5 Earnings Short-Squeeze Trade Ideas

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.

MACOM Technology Solutions

My first earnings short-squeeze trade idea 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 Technology Solutions to report revenue of $152.01 million on earnings of 56 cents per share.

The current short interest as a percentage of the float for MACOM Technology Solutions is extremely high at 20.3%. That means that out of the 33.57 million shares in the tradable float, 6.82 million shares are sold short by the bears.

From a technical perspective, MACOM Technology Solutions 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 $45.12 a share to its recent high of $49.78 a share. During that uptrend, shares of MACOM Technology Solutions have been making mostly higher lows and higher highs, which is bullish technical price action. That bump to the upside has now pushed this stock within range of triggering a near-term breakout trade post-earnings.

If you're bullish on MACOM Technology Solutions, 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 $49.78 to $50.62 a share with high volume. Look for volume on that move that registers near or above its three-month average action of 541,618 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 $53.80 a share. Any high-volume move above that level will then give this stock a chance to make a run at $55 to $60 a share.

I would simply avoid MACOM Technology Solutions 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 $47.07 a share to more near-term support at $47.01 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 $45.12 to $44.04, or even its 200-day moving average of $40.80 a share.

Cavium

Another potential earnings short-squeeze trading opportunity is technology player Cavium (CAVM) , which is set to release numbers on Wednesday after the market close. Wall Street analysts, on average, expect Cavium to report revenue of $224.49 million on earnings of 54 cents per share.

The current short interest as a percentage of the float for Cavium is pretty high at 12.2%. That means that out of the 64.76 million shares in the tradable float, 7.91 million shares are sold short by the bears.

From a technical perspective, Cavium is currently trending above both its 50-day and 200-day moving averages, which is bullish. This stock has been uptrending over the last three months, with shares moving higher off its low of around $51 a share to its recent high of $66.19 a share. During that uptrend, shares of Cavium 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 above some key overhead resistance levels.

If you're in the bull camp on Cavium, 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 $66 to its 52-week high of $66.19 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 997,736 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 its next major overhead resistance levels at $68 to $73, or even $74 to $77 a share.

I would simply avoid Cavium 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 $63.32 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 its 50-day moving average of $61.43 a share to $60.50, or even $56 to $54 a share.

Post Holdings

Another potential earnings short-squeeze candidate is consumer goods player Post Holdings (POST) , which is set to release numbers on Thursday after the market close. Wall Street analysts, on average, expect Post Holdings to report revenue of $1.24 billion on earnings of 55 cents per share.

The current short interest as a percentage of the float for Post Holdings is pretty high at 10.9%. That means that out of the 62.81 million shares in the tradable float, 6.90 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 0.2%, or by about 12,000 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, Post Holdings 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 $68.76 a share to its recent high of $85.44 a share. During that uptrend, shares of Post Holdings have been making mostly higher lows and higher highs, which is bullish technical price action. That strong move higher has now pushed this stock within range of triggering a major breakout trade post-earnings above some key overhead resistance levels.

If you're bullish on Post Holdings, 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 $83.31 a share and then above more key resistance levels at $85.44 to $86.96 a share and then above its 52-week high of $89 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 1.01 million shares. If that breakout triggers 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 $95 to $100, or even $105 to $110 a share.

I would avoid Post Holdings or look for short-biased trades if after earnings it fails to trigger that breakout and then drops below some near-term support levels at $82 to $81 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 $79.58 a share to its 200-day moving average of $79.25 a share, or even $76 to $75 a share.

Murphy USA

Another earnings short-squeeze prospect is chain of retail stores operator Murphy USA (MUSA) , which is set to release numbers on Wednesday after the market close. Wall Street analysts, on average, expect Murphy USA to report revenue of $3.06 billion on earnings of $1.03 per share.

The current short interest as a percentage of the float for Murphy USA is pretty high at 9.2%. That means that out of 36.87 million shares in the tradable float, 3.42 million shares are sold short by the bear. The bears have also been increasing their bets from the last reporting period by 8.9%, or by about 279,000 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, Murphy USA is currently trending below both its 50-day and 200-day moving averages, which is bearish. This stock has been uptrending a bit over the last month or so, with shares moving higher off its low of $60.44 a share to its recent high of $64.57 a share. During that uptrend, shares of Murphy USA 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 near-term breakout trade post-earnings above some near-term overhead resistance levels.

If you're bullish on Murphy USA, 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 $64.57 to its 50-day moving average of $65.30 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 429,781 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 $68.29 to its 200-day moving average of $68.90 a share, or even $70 to $72 a share.

I would simply avoid Murphy USA 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 $62.71 a share and then below more near-term support at $60.44 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 $57.13 to $56.92, or even its 52-week low of $54.28 a share.

Lannett Company

My final earnings short-squeeze play is generic drug player Gannett  (LCI) , which is set to release numbers on Wednesday after the market close. Wall Street analysts, on average, expect Lannett to report revenue of $169.04 million on earnings of 84 cents per share.

The current short interest as a percentage of the float for Lannett is extremely high at 42.5%. That means that out of the 27.60 million shares in the tradable float, 11.73 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 4.6%, or by about 512,000 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 run to cover some of their trades.

From a technical perspective, Lannett 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 $25.85 a share to its recent low of $18.25 a share. During that downtrend, shares of Lannett have been making mostly lower highs and lower lows, which is bearish technical price action.

If you're in the bull camp on Lannett 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 $19.80 to its 20-day moving average of $22.19 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 1.18 million shares. If that breakout hits post-earnings, then this stock will set up to re-test or possibly take out its next major overhead resistance levels at its 20-day moving average of $22.19 a share to $23.70, or even its 200-day moving average of $24.92 a share to $26 a share.

I would avoid Lannett 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 $18.70 to $18.25 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 52-week low of $16.75 to $15, or even $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.

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