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.
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.
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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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Tesla Motors
My first earnings short-squeeze trade idea is electric vehicle player Tesla Motors (TSLA), which is set to release numbers on Thursday after the market close. Wall Street analysts, on average, expect Tesla Motors to report revenue of $810.61 million on earnings of 4 cents per share.
The current short interest as a percentage of the float for Tesla Motors is extremely high at 26%. That means that out of the 90.33 million shares in the tradable float, 24.14 million shares are sold short by the bears. If the bulls get the earnings news they're looking for, then shares of Tesla Motors could easily explode sharply higher post-earnings as the bears rush to cover some of their trades.
From a technical perspective, TSLA is currently trending above both its 50-day and 200-day moving averages, which is bullish. This stock recently formed a double bottom chart pattern at $214.27 to $213.60 a share. Following that bottom, shares of TSLA have started to trend higher right above its 50-day moving average to its recent high of $232 a share. That move has now pushed shares of TSLA within range of triggering a big breakout trade post-earnings.
If you're bullish on TSLA, 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 $232 to $244.50 a share with high volume. Look for volume on that move that registers near or above its three-month average volume of 5.71 million shares. If that breakout hits post-earnings, then TSLA will set up to re-test or possibly take out its next major overhead resistance levels at $260 to its all-time high at $265 a share.
I would simply avoid TSLA or look for short-biased trades if after earnings it fails to trigger that breakout and then drops back below its 50-day moving average of $218.31 a share with high volume. If we get that move, then TSLA will set up to re-test or possibly take out its next major support levels at $213.60 to around $200 a share, or even its 200-day moving average of $191.36 a share.
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KEYW Holding
Another potential earnings short-squeeze play is cybersecurity, cyber superiority and geospatial intelligence solutions player KEYW Holding (KEYW), which is set to release its numbers on Thursday after the market close. Wall Street analysts, on average, expect KEYW Holding to report revenue $72.90 million on a loss of 3 cents per share.
The current short interest as a percentage of the float for KEYW Holding is extremely high at 33.4%. That means that out of the 34.27 million shares in the tradable float, 11.47 million shares are sold short by the bears. This is a huge short interest on a stock with a relatively low tradable float. If the bulls get the earnings news they're expecting, then shares of KEYW could easily soar sharply higher post-earnings as the bears jump to cover some of their trades.
From a technical perspective, KEYW is currently trending above its 50-day moving average and just below its 200-day moving average, which is neutral trendwise. This stock has been uptrending strong for the last two months, with shares moving higher from its low of $9.71 to its intraday high of $14.37 a share. During that move, shares of KEYW have been consistently making higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of KEYW within range of triggering a big breakout trade post-earnings.
If you're in the bull camp on KEYW, then I would wait until after its report and look for long-biased trades if this stock manages to break out above some past overhead resistance at $15.20 a share with high volume. Look for volume on that move that hits near or above its three-month average volume of 509,624 shares. If that breakout kicks off post-earnings, then KEYW will set up to re-test or possibly take out its next major overhead resistance levels at $16 to $18, or even $19.71 to $20 a share.
I would simply avoid KEYW 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 $13.21 to $13 a share with high volume. If we get that move, then KEYW will set up to re-test or possibly take out its next major support levels at its 50-day moving average of $11.98 to $11.93, or even $11.40 to $11 a share.
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SodaStream International
Another potential earnings short-squeeze candidate is beverage carbonation systems and related products player SodaStream International (SODA), which is set to release numbers on Wednesday before the market open. Wall Street analysts, on average, expect SodaStream International to report revenue of $140.56 million on earnings of 31 cents per share.
The current short interest as a percentage of the float for SodaStream International is extremely high at 31%. That means that out of the 20.75 million shares in the tradable float, 6.46 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 281,886 shares. If the bears get caught pressing their bets into a bullish quarter, then shares of SODA could easily explode sharply higher post-earnings as the shorts rush to cover some of their positions.
From a technical perspective, SODA is currently trending below both its 50-day and 200-day moving averages, which is bearish. This stock recently exploded to the upside from around $29 to $36.53 with heavy upside volume flows. Following that one-day spike, shares of SODA have sold off sharply to its current price of around $30 a share with lighter downside volume flows.
If you're bullish on SODA, 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 $31.50 to $32.50 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 begins post-earnings, then SODA will set up to re-test or possibly take out its next major overhead resistance levels at $36.53 to $39.70, or even $42 a share.
I would avoid SODA or look for short-biased trades if after earnings it fails to trigger that breakout and then takes out its 52-week low of $28.65 a share with high volume. If we get that move, then SODA will set up to enter new 52-week-low territory, which is bearish technical price action. Some possible downside targets off that move are $25 to $20 a share.
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World Wrestling Entertainment
Another earnings short-squeeze prospect is integrated media and entertainment player World Wrestling Entertainment (WWE), which is set to release numbers on Thursday before the market open. Wall Street analysts, on average, expect World Wrestling Entertainment to report revenue of $156.98 million on a loss of 20 cents per share.
The current short interest as a percentage of the float for World Wrestling Entertainment is extremely high at 22%. That means that out of the 32.12 million shares in the tradable float, 7.07 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 2.7%, or by about 182,000 shares. If the bears get caught pressing their bets into a strong quarter, then shares of WWE could easily rip sharply higher post-earnings as the shorts move to cover some of their trades.
From a technical perspective, WWE 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 two months and change, with shares moving higher from its low of $10.44 to its recent high of $13.08 a share. During that uptrend, shares of WWE have been consistently making higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of WWE within range of triggering a major breakout trade post-earnings.
If you're bullish on WWE, 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 at $13.08 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 2.25 million shares. If that breakout kicks off post-earnings, then WWE will set up to re-fill some of its massive gap-down-day zone from May that started at $20.43 a share.
I would simply avoid WWE or look for short-biased trades if after earnings it fails to trigger that breakout and then takes out some key near-term support levels at $12.09 to its 50-day moving average of $11.64 a share with high volume. If we get that move, then WWE will set up to re-test or possibly take out its next major support levels $10.77 to $10.44 a share. Any high-volume move below those levels will then give WWE a chance to re-test or take out its 52-week low of $9.62 a share.
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3D Systems
My final earnings short-squeeze play is 3D printing centric design-to-manufacturing solutions player 3D Systems (DDD), which is set to release numbers on Thursday before the market open. Wall Street analysts, on average, expect 3D Systems to report revenue of $162.28 million on earnings of 18 cents per share.
The current short interest as a percentage of the float for 3D Systems is extremely high at 34.5%. That means that out of the 98.72 million shares in the tradable float, 34.05 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 5.3%, or by about 1.71 million shares. If the bears get caught pressing their bets into a bullish quarter, then shares of DDD could easily explode sharply higher post-earnings as the shorts rush to cover some of their positions.
From a technical perspective, DDD 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 downtrending badly for the last month, with shares moving lower from its high of $69.56 to its recent low of $51.60 a share. During that downtrend, shares of DDD have been making mostly lower highs and lower lows, which is bearish technical price action. That said, shares of DDD have now started to bounce higher off that $51.60 low and it's starting to flirt with its 50-day moving average of $54.28 a share.
If you're in the bull camp on DDD, 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 $57.50 to $58.64 a share with high volume. Look for volume on that move that registers near or above its three-month average action of 4.34 million shares. If that breakout gets started post-earnings, then DD will set up to re-test or possibly take out its next major overhead resistance levels at its 200-day moving average of 64.90 to $69.56 a share.
I would avoid DDD 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 $51.60 to $50 a share with high volume. If we get that move, then DDD will set up to re-test or possibly take out its next major support levels at $48.10 to $47.08, or even $45.42 to its 52-week low at $43.35 a share.
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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