DELAFIELD, Wis. (Stockpickr) -- 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.
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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 technically very bullish 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, here's a look at several stocks that could experience big short squeezes when they report earnings this week.
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Container Store Group
My first earnings short-squeeze play is storage and organization products player Container Store Group (TCS), which is set to release numbers on Monday after the market close. Wall Street analysts, on average, expect Container Store Group to report revenue of $199.24 million on earnings of 11 cents per share.
The current short interest as a percentage of the float for Container Store Group is extremely high at 20.8%. That means that out of the 16.69 million shares in the tradable float, 3.47 million shares are sold short by the bears. This is a large short interest on a stock with a very low tradable float. If the bulls get the earnings news they're looking for, then shares of TCS could easily rip sharply higher post-earnings as the bears rush to cover some of their trades.
From a technical perspective, TCS is currently trending below both its 50-day and 200-day moving averages, which is bearish. This stock has been trending sideways and consolidating for the last two months and change, with shares moving between $20.32 on the downside and $23.72 on the upside. Any high-volume move above the upper end of its recent range post-earnings could trigger a big breakout trade for shares of TSC.
If you're bullish on TCS, then I would wait until after its report and look for long-biased trades if this stock manages to break out above some key near-term overhead resistance levels at $23.23 to $23.72 a share with high volume. Look for volume on that move that registers near or above its three-month average action of 455,380 shares. If that breakout hits post-earnings, then TSC will set up to re-test or possibly takeout its next major overhead resistance levels at $28 to its 200-day moving average of $29.76 a share. Any high-volume move above those levels will then give TCS a chance to trend north of $30 a share.
I would simply avoid TCS 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 $21.11 to $20.65 a share and then below its all-time low of $20.32 a share with high volume. If we get that move, then TCS will set up to enter new all-time-low territory, which is bearish technical price action. Some possible downside targets off that move are $17 to $15 a share.
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E2open
Another potential earnings short-squeeze trade idea is cloud-based and on-demand software solutions for supply chain management provider E2open (EOPN), which is set to release its numbers on Wednesday after the market close. Wall Street analysts, on average, expect E2open to report revenue $20.53 million on a loss of 14 cents per share.
The current short interest as a percentage of the float for E2open is extremely high at 20.7%. That means that out of the 18.04 million shares in the tradable float, 3.74 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period b 2.6%, or by 93,000 shares. If the bears get caught pressing their bets into a strong quarter, then shares of EOPN could easily trend sharply higher post-earnings as the bears rush to cover some of their positions.
From a technical perspective, EOPN is currently trending well below both its 50-day and 200-day moving averages, which is bearish. This stock has been downtrending badly for the last three months, with shares plunging lower from its high of $21.90 to its new 52-week low of $8.89 a share. During that downtrend, shares of EOPN have been consistently making lower highs and lower lows, which is bearish technical price action.
If you're in the bull camp on EOPN, 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 $9.67 to $10.96 a share and then above $11.30 a share with high volume. Look for volume on that move that hits near or above its three-month average volume of 280,178 shares. If that breakout kicks off post-earnings, then EOPN will set up to re-fill some of its previous gap-down-day zone from September above $11.30 that started near $16 a share.
I would simply avoid EOPN or look for short-biased trades if after earnings it fails to trigger that breakout and then drops below its new 52-week low of $8.89 a share with high volume. If we get that move, then EOPN will set up to enter new 52-week-low territory, which is bearish technical price action. Some possible downside targets off that move are $8 to $7 a share.
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Monsanto
Another potential earnings short-squeeze candidate is agricultural products player Monsanto (MON), which is set to release numbers on Wednesday before the market open. Wall Street analysts, on average, expect Monsanto to report revenue of $2.41 billion on a loss of 23 cents per share.
The current short interest as a percentage of the float for Monsanto stands at 6%. That means that out of the 523.10 million shares in the tradable float, 31.37 million shares are sold short by the bears. This isn't a huge short interest, but it's more than enough to spark a decent short-covering rally post-earnings if Monsanto can deliver the earnings news the bulls are looking for.
From a technical perspective, MON is currently trending below both its 50-day and 200-day moving averages, which is bearish. This stock has been downtrending badly for the last three months and change, with shares moving lower from its high of $128.35 to its recent low of $109.36 a share. During that downtrend, shares of MON have been making mostly lower highs and lower lows, which is bearish technical price action. That said, shares of MON have now traded into some previous support levels from back in April at around $109 a share.
If you're bullish on MON, 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 at $112 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 3.86 million shares. If that breakout begins post-earnings, then MON will set up to re-test or possibly take out its next major overhead resistance levels at its 200-day moving average of $114.60 a share to its 50-day moving average of $114.88 a share. Any high-volume move above those levels will then give MON a chance to tag its next major overhead resistance level at $116.33 a share.
I would avoid MON 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 $109.36 to $109 a share with high volume. If we get that move, then MON will set up to re-test or possibly take out its next major support level at $103.33 to its 52-week low of $102.88 a share.
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CalAmp
Another earnings short-squeeze prospect is wireless communications products and solutions developer CalAmp (CAMP), which is set to release numbers on Monday after the market close. Wall Street analysts, on average, expect CalAmp to report revenue of $59.06 million on earnings of 19 cents per share.
The current short interest as a percentage of the float for CalAmp is pretty high at 8%. That means that out of 34.05 million shares in the tradable float, 2.72 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 13%, or by 314,000 shares. If the bears get caught pressing their bets into a bullish quarter, then shares of CAMP could easily rip sharply higher post-earnings as the shorts move to cover some of their trades.
From a technical perspective, CAMP is currently trending below both its 50-day and 200-day moving averages, which is bearish. This stock has started to form a bottoming chart pattern over the last three months, since shares have found buying interest each time its pulled back below $17 a share. If that bottom can hold post-earnings, then shares of CAMP could set up to trend higher and break out above some near-term overhead resistance levels.
If you're bullish on CAMP, 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 $18.37 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 636,777 shares. If that breakout develops post-earnings, then CAMP will set up to re-test or possibly take out its next major overhead resistance levels at $20.84 to $22.36 a share, or even its 200-day moving average of $23 a share.
I would simply avoid CAMP or look for short-biased trades if after earnings it fails to trigger that breakout and then takes out some key near-term support at $16.03 a share with high volume. If we get that move, then CAMP will set up to re-test or possibly take out its next major support levels at its 52-week low of $14.74 a share.
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Alcoa
My final earnings short-squeeze play is aluminum, fabricated aluminum and alumina producer Alcoa (AA), which is set to release numbers on Wednesday after the market close. Wall Street analysts, on average, expect Alcoa to report revenue of $5.84 billion on earnings of 22 cents per share.
The current short interest as a percentage of the float for Alcoa sits at 1.9%. That means that out of the 36.73 million shares in the tradable float, 689,900 shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 2.2%, or by 1.34 million shares. If the bears get caught pressing their bets into a bullish quarter, then shares of AA could easily move sharply higher post-earnings as the shorts rush to cover some of their bets.
From a technical perspective, AA is currently trending above its 200-day moving average and just below its 50-day moving average, which is neutral trendwise. This stock has been downtrending a bit over the last month, with shares moving lower from its high of $17.36 to its recent low of $14.89 a share. During that move, shares of AA have been consistently making lower highs and lower lows, which is bearish technical price action. That said, shares of AA have now started to bounce off that $14.89 low and it's quickly approaching a breakout trade that could trigger post-earnings.
If you're in the bull camp on AA, 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 $16.38 a share and then above more near-term overhead resistance levels at $16.34 to $$16.50 a share with high volume. Look for volume on that move that registers near or above its three-month average action of 17.47 million shares. If that breakout materializes post-earnings, then AA will set up to re-test or possibly take out its 52-week high of $17.36 a share. Any high-volume move above that level will then give AA a chance to trend north towards $20 a share.
I would avoid AA or look for short-biased trades if after earnings it fails to trigger that breakout, and then drop below some key near-term support levels at $15.50 to $14.89 a share with high volume. If we get that move, then AA will set up to re-test or possibly take out its next major support levels at its 200-day moving average of $13.74 a share to $13 a share.
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To see more potential earnings short squeeze plays, check out the Earnings Short-Squeeze Plays portfolio on Stockpickr.
-- Written by Roberto Pedone in Delafield, Wis.
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At the time of publication, author had no positions in stocks mentioned.
Roberto Pedone, based out of Delafield, Wis., is an independent trader who focuses on technical analysis for small- and large-cap stocks, options, futures, commodities and currencies. Roberto studied international business at the Milwaukee School of Engineering, and he spent a year overseas studying business in Lubeck, Germany. His work has appeared on financial outlets including
CNBC.com and Forbes.com.You can follow Pedone on Twitter at www.twitter.com/zerosum24 or @zerosum24.
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