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 The Street doesn't like the numbers or guidance.
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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.
NovaGold Resources
My first earnings short-squeeze play is gold mining player NovaGold Resources (NG), which is set to release numbers on Monday after the market close. There are currently no analysts' estimates available for NovaGold Resources.
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The current short interest as a percentage of the float for NovaGold Resources is pretty high at 10.2%. That means that out of the 176.91 million shares in the tradable float, 18.13 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 6.2%, or by about 1.06 million shares. If the bears get caught pressing their bets into a bullish quarter, then shares of NG could easily rip sharply higher post-earnings as the bears rush to cover some of their bets.
From a technical perspective, NG 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 six months, with shares moving higher from its low of $2.04 to its recent high of $4.62 a share. During that uptrend, shares of NG have been making mostly higher lows and higher highs, which is bullish technical price action. Shares of NG are now trending within range of triggering a near-term breakout trade post-earnings.
If you're bullish on NG, 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 $3.80 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 2.62 million shares. If that breakout gets underway, then NG will set up to re-test or possibly take out its next major overhead resistance levels at $4.21 to its 52-week high at $4.62 a share.
I would simply avoid NG 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 at $3.61 a share to more near-term support at $3.41 a share with high volume. If we get that move, then NG will set up to re-test or possibly take out its next major support levels $3 to its 200-day moving average of $2.75 a share.
Bed Bath & Beyond
Another potential earnings short-squeeze trade idea is home furnishing chain store operator Bed Bath & Beyond (BBBY), which is set to release its numbers on Wednesday after the market close. Wall Street analysts, on average, expect Bed Bath & Beyond to report revenue $3.22 billion on earnings of $1.60 per share.
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The current short interest as a percentage of the float for Bed Bath & Beyond sits at 4.97%. That means that out of the 202.61 million shares in the tradable float, 10.07 million shares are sold short by the bears. If the bulls get the earnings news they're looking for, then shares of BBBY could easily jump sharply higher post-earnings as the bears move to cover some of their bets.
From a technical perspective, BBBY is currently trending above its 50-day moving average and below its 200-day moving average, which is neutral trendwise. This stock has been trending sideways over the last month, with shares moving between 66.99 on the downside and $70.98 on the upside. Any high-volume move above the upper-end of its recent range post-earnings could trigger a breakout trade for shares of BBBY.
If you're in the bull camp on BBBY, 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 $70 to $70.98 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 3.03 million shares. If that breakout hits, then BBBY will set up to re-fill some of its previous gap-down-day zone from January that started at $80 a share.
I would simply avoid BBBY 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 $66.81 a share to more near-term support at $66 a share with high volume. If we get that move, then BBBY will set up to re-test or possibly take out its next major support levels at $64 to its 52-week low of $62.12 a share.
BSD Medical
Another potential earnings short-squeeze candidate is health care player BSD Medical (BSDM), which is set to release numbers on Wednesday before the market open. There are currently no analysts' estimates available for BSD Medical.
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The current short interest as a percentage of the float for BSD Medical is notable at 3.89%. That means that out of the 25.60 million shares in the tradable float, 995,000 shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 10.2%, or by about 92,000 shares. If the bears get caught pressing their bets into a strong quarter, then shares of BSDM could easily spike sharply higher post-earnings as the shorts jump to cover some of their trades.
From a technical perspective, BSDM 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 a bit over the last few weeks, with shares moving higher from its low of $1.25 to its recent high of $1.39 a share. During that move, shares of BSDM have been making mostly higher lows and higher highs, which is bullish technical price action. That move has started to push shares of BSDM within range of triggering a near-term breakout trade post-earnings.
If you're bullish on BSDM, 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 $1.39 to $1.40 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 156,967 shares. If that breakout starts, then BSDM will set up to re-test or possibly take out its next major overhead resistance levels at $1.51 to $1.66 a share, or even its 52-week high at $1.87 a share.
I would avoid BSDM 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 $1.25 to $1.23 a share with high volume. If we get that move, then BSDM will set up to re-test or possibly take out its next major support levels at $1.14 to $1.13 a share, or even $1.05 a share.
Apogee Enterprises
Another earnings short-squeeze prospect is Apogee Enterprises (APOG), a designer and developer of glass products, services and systems, which is set to release numbers on Wednesday after the market close. Wall Street analysts, on average, expect Apogee Enterprises to report revenue of $209.23 million on earnings of 29 cents per share.
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The current short interest as a percentage of the float for Apogee Enterprises stands at 5.8%. That means that out of the 28 million shares in the tradable float, 1.64 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 6.3%, or by about 97,000 shares. If the bears get caught pressing their bets into a bullish quarter, then shares of APOG could easily trend sharply higher post-earnings as the shorts move to cover some of their trades.
From a technical perspective, APOG is currently trending below its 50-day moving average and just above its 200-day moving average, which is neutral trendwise. This stock has been downtrending badly for the last two months and change, with shares moving lower from its high of $37.61 to its recent low of $30.97 a share. During that move, shares of APOG have been mostly making lower highs and lower lows, which is bearish technical price action.
If you're bullish on APOG, then I would wait until after its report and look for long-biased trades if this stock manages to break out above it 50-day moving average of $33.27 a share and then once it takes out some more near-term overhead resistance levels at $33.72 to $35.64 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 189,243 shares. If that breakout hits, then APOG will set up to re-test or possibly take out its 52-week high at $37.73 a share.
I would simply avoid APOG or look for short-biased trades if after earnings it fails to trigger that breakout and then drops below some key near-term support at $30.97 a share with high volume. If we get that move, then APOG will set up to re-test or possibly take out its next major support levels at $28.84 to $27 a share, or even $25 a share.
Ruby Tuesday
My final earnings short-squeeze play is casual dining restaurant chain operator Ruby Tuesday (RT), which is set to release numbers on Wednesday after the market close. Wall Street analysts, on average, expect Ruby Tuesday to report revenue of $284.61 million on a loss of 7 cents per share.
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The current short interest as a percentage of the float for Ruby Tuesday stands at 5.6%. That means that out of the 58.01 million shares in the tradable float, 3.27 million shares are sold short by the bears. If the bulls get the earnings news they're looking for, then shares of RT could easily spike sharply higher post-earnings as the bears rush to cover some of their bets.
From a technical perspective, RT is currently trending below both its 50-day and 200-day moving averages, which is bearish. This stock has been downtrending badly over the last four months, with shares moving lower from its high of $7.68 to its recent low of $5.14 a share. During that move, shares of RT have been making mostly lower highs and lower lows, which is bearish technical price action. That said, shares of RT recently formed a double bottom chart pattern at $5.14 to $5.17 a share. Shares of RT have now started to move within range of triggering a near-term breakout trade post-earnings.
If you're in the bull camp on RT, 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 $5.65 a share and then once it takes out more near-term overhead resistance at $5.76 with high volume. Look for volume on that move that hits near or above its three-month average volume of 703,836 shares. If that breakout hits, then RT will set up to re-test or possibly take out its next major overhead resistance levels at $6.19 to $7 a share.
I would avoid RT or look for short-biased trades if after earnings it fails to trigger that breakout, and then drops back below that double bottom support area at $5.17 to $5.14 a share with high volume. If we get that move, then RT will set up to enter new 52-week-low territory below $5.14, which is bearish technical price action. Some possible downside targets off that move are $4.505 to $4 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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