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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My first earnings short-squeeze play is China-based social media platform player Weibo (WB), which is set to release numbers on Thursday after the market close. Wall Street analysts, on average, expect Weibo to report revenue of $81.51 million on a loss of 1 cent per share.
The current short interest as a percentage of the float for Weibo is extremely 46.7%. That means that out of the 9.40 million shares in the tradable float, 4.39 million shares are sold short by the bears. This is a monster short interest on a stock with a very low tradable float. Any bullish earnings news could easily set off a huge short-squeeze for shares of WB post-earnings.
From a technical perspective, WB is currently trending above its 50-day moving average, which is bullish. This stock has been uptrending over the last month, with shares moving higher from its low of $16.72 to its recent high of $19.95 a share. During that uptrend, shares of WB have been making mostly higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of WB within range of triggering a near-term breakout trade.
If you're bullish on WB, 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 $19.95 to just over $20 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 1.23 million shares. If that breakout hits post-earnings, then WB will set up to re-test or possibly take out its next major overhead resistance levels at $24 to its 52-week high at $26.08 a share. Any high-volume move above $26.08 will then give WB a chance to tag or take out $30 a share.
I would simply avoid WB 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 $18.51 to $17.63 a share with high volume. If we get that move, then WB will set up to re-test or possibly take out its 52-week low of $16.26 a share.
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Kohl's
Another potential earnings short-squeeze play is department store player Kohl's (DDS), which is set to release its numbers on Thursday before the market open. Wall Street analysts, on average, expect Kohl's to report revenue of $4.41 billion on earnings of 74 cents per share.
The current short interest as a percentage of the float for Kohl's is pretty high at 12.6%. That means that out of the 202.66 million shares in the tradable float, 25.70 million shares are sold short by the bears. If the bulls get the earnings news they're looking for, then shares of KSS could easily rip sharply higher post-earnings as the bears jump to cover some of their trades.
From a technical perspective, KSS is currently trending just below its 50-day moving average and above its 200-day moving average, which is neutral trendwise. This stock has been uptrending a bit over the last few weeks, with shares moving higher from its low of $53.86 to its recent high of $57.70 a share. That move has now pushed shares of KSS within range of triggering a big breakout trade post-earnings above some key near-term overhead resistance levels.
If you're in the bull camp on KSS, 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 $57.70 to its 50-day moving average of $58.58 a share and then above more resistance at $59.62 a share with high volume. Look for volume on that move that registers near or above its three-month average volume of 3.09 million shares. If that breakout kicks off post-earnings, then KSS will set up to re-test or possibly take out its next major overhead resistance levels at $61.90 to its 52-week high at $63.54 a share. Any high-volume move above its 52-week high will then give KSS a chance to tag or take out $70 a share.
I would simply avoid KSS 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 its 200-day moving average of $54.81 a share to more support at $53.86 a share with high volume. If we get that move, then KSS will set up to re-test or possibly take out its next major support levels at $50.57 a share to its 52-week low of $48.68 a share.
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Revance Therapeutics
Another potential earnings short-squeeze candidate is biopharmaceutical player Revance Therapeutics (RVNC), which is set to release numbers on Wednesday after the market close. Wall Street analysts, on average, expect Revance Therapeutics to report revenue of $100,000 on a loss of 69 cents per share.
The current short interest as a percentage of the float for Revance Therapeutics is notable at 6.7%. That means that out of the 15.53 million shares in the tradable float, 1.04 million shares are sold short by the bears. If the bulls get the earnings news they're looking for, then shares of RVNC could easily surge sharply higher post-earnings as the bears rush to cover some of their bets. Keep in mind that this company has a very low float, so a solid quarter could easily produce a big short-squeeze.
From a technical perspective, RVNC is currently trending above its 50-day moving average, which is bullish. This stock has been uptrending over the last month, with shares moving higher from its low of $14.62 to its recent high of $20.96 a share. During that uptrend, shares of RVNC have been consistently making higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of RVNC within range of triggering a near-term breakout trade above some key overhead resistance levels.
If you're bullish on RVNC, 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 $20.96 to $21.25 a share and then above more resistance at $22.05 a share with high volume. Look for volume on that move that registers near or above its three-month average action of 168,002 shares. If that breakout materializes post-earnings, then RVNC will set up to re-test or possibly take out its next major overhead resistance levels at $24.30 to $25.88 a share, or even $30 to $33 a share.
I would avoid RVNC 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 $19.31 a share with high volume. If we get that move, then RVNC will set up to re-test or possibly take out its next major support levels at $17.94 to $17.02 a share, or even $16 to its 52-week low of $14.62 a share.
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Sally Beauty
Another earnings short-squeeze prospect is professional beauty supplies specialty retailer Sally Beauty (SBH), which is set to release numbers on Thursday before the market open. Wall Street analysts, on average, expect Sally Beauty to report revenue of $945.38 million on earnings of 40 cents per share.
The current short interest as a percentage of the float for Sally Beauty is notable at 4.6%. That means that out of 146.18 million shares in the tradable float, 6.77 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 1.3%, or by 91,000 shares. If the bears get caught pressing their bets into a strong quarter, then shares of SBH could easily rip higher post-earnings as the bears scramble to cover some of their positions.
From a technical perspective, SBH is currently trending above both its 50-day and 200-day moving averages, which is bullish. This stock has been uptrending strong for the last four months, with shares moving higher from its low of $24.09 to its recent high of $29.73 a share. During that uptrend, shares of SBH have been consistently making higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of SBH within range of triggering a near-term breakout trade above some key overhead resistance levels.
If you're bullish on SBH, 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 $29.53 to $29.73 a and then above its 52-week high at $31.86 a share with high volume. Look for volume on that move that registers near or above its three-month average action of 939,032 shares. If that breakout develops post-earnings, then SBH will set up to trend towards $35 to $40 a share.
I would simply avoid SBH 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 $28.37 to its 50-day moving average of $28.25 a share with high volume. If we get that move, then SBH will set up to re-test or possibly take out its next major support levels at its 200-day moving average of $26.99 to $26.80 a share. Any high-volume move below those levels will then give SBH a chance to tag $25 to $24 a share.
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Applied Materials
My final earnings short-squeeze trade idea is semiconductor player Applied Materials (AMAT), which is set to release numbers on Thursday after the market close. Wall Street analysts, on average, expect Applied Materials to report revenue of $2.27 billion on earnings of 27 cents per share.
The current short interest as a percentage of the float for Applied Materials is notable at 6%. That means that out of the 1.21 billion shares in the tradable float, 73.42 million shares are sold short by the bears. This is a big short interest on a stock with a very low tradable float. The bears have also been increasing their bets from the last reporting period by 1.6%, or by 1.14 million shares. If the bears get caught pressing their bets into a bullish quarter, then shares of AMAT could easily jump sharply higher post-earnings as the bears rush to cover some of their trades.
From a technical perspective, AMAT 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 few weeks, with shares moving higher from its low of $18.63 to its high of $22.96 a share. During that uptrend, shares of AMAT have been consistently making higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of AMAT within range of triggering a big breakout trade post-earnings.
If you're in the bull camp on AMAT, 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 $22.96 to $23.16 a share and then above its 52-week high at $23.46 a share with high volume. Look for volume on that move that registers near or above its three-month average action of 13.31 million shares. If that breakout develops post-earnings, then AMAT will set up to trend towards $30 to $35 a share.
I would avoid AMAT 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 its 50-day of $21.49 a share to its 200-day at $20.61 a share with high volume. If we get that move, then AMAT will set up to re-test or possibly take out its next major support levels at $18.63 to $18.31 a share, or even its 52-week low of $16.40 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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