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. Must Read: Warren Buffett's Top 10 Dividend Stocks 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. Must Read: 12 Stocks Warren Buffett Loves in 2014 Aeropostale My first earnings short-squeeze trade idea is mall-based casual apparel specialty retailer Aeropostale , which is set to release numbers on Wednesday after the market close. Wall Street analysts, on average, expect Aeropostale to report revenue of $444.73 million on a loss of 45 cents per share. The current short interest as a percentage of the float for Aeropostale is extremely high at 35.2%. That means that out of the 59.23 million shares in the tradable float, 20.90 million shares are sold short by the bears. If the bulls get the earnings news they're looking for, then shares of ARO could easily soar sharply higher post-earnings as the bears scramble to cover some of their positions. From a technical perspective, ARO is currently trending below its 200-day moving average and just above its 50-day moving average, which is neutral trendwise. This stock pulled back sharply on Monday and finished the trading session just above its 50-day moving average. This pullback follows a recent breakout for shares of ARO above some near-term overhead resistance levels at $3.18 to $3.20 a share. If you're bullish on ARO, 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 $3.50 to $3.69 a share with high volume. Look for volume on that move that registers near or above its three-month average action of 2.08 million shares. If that breakout triggers post-earnings, then ARO will set up to re-test or possibly take out its next major overhead resistance levels at its 200-day moving average of $4.10 to $4.30 a share, to even $5 a share. I would simply avoid ARO or look for short-biased trades if after earnings it fails to trigger that breakout and then drops back below both its 50-day at $3.11 to some more near-term support at $3 a share with high volume. If we get that move, then ARO will set up to re-test or possibly take out its next major support level at its 52-week low of $2.68 a share. Must Read: 10 Stocks George Soros Is Buying Guidewire Software Another potential earnings short-squeeze play is property and casualty insurance software provider Guidewire Software , which is set to release its numbers on Tuesday after the market close. Wall Street analysts, on average, expect Guidewire Software to report revenue $75.98 million on earnings of 3 cents per share. The current short interest as a percentage of the float for Guidewire Software is rather high at 7.4%. That means that out of the 68.90 million shares in the tradable float, 5.09 million shares are sold short by the bears. If this company can deliver this earnings news the bulls are looking for, then shares of GWRE could easily rip sharply higher post-earnings as the bears rush to cover some of their short bets. From a technical perspective, GWRE 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 $35.87 to its recent high of $53.43 a share. During that uptrend, shares of GWRE have been consistently making higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of GWRE within range of triggering a major breakout trade post-earnings. If you're in the bull camp on GWRE, 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 $51.94 to $53.43 a share with high volume. Look for volume on that move that hits near or above its three-month average volume of 498,256 shares. If that breakout develops post-earnings, then GWRE will set up to re-test or possibly take out its all-time high at $58 a share. Any high-volume move above $58 will then give GWRE a chance to trend north of $60 a share. I would simply avoid GWRE or 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 $48.71 to its 50-day at $48.22 a share with high volume. If we get that move, then GWRE will set up to re-test or possibly take out its next major support levels at its 200-day moving average of $44.34 to right around $43 a share. Must Read: 7 Stocks Warren Buffett Is Selling in 2014 Sears Holdings Another potential earnings short-squeeze candidate is department stores player Sears Holdings , which is set to release numbers on Thursday before the market open. Wall Street analysts, on average, expect Sears Holdings to report revenue of $6.88 billion on a loss of $3.31 per share. The current short interest as a percentage of the float for Sears Holdings is extremely high at 18.9%. That means that out of the 49.44 million shares in the tradable float, 15.02 million shares are sold short by the bears. If the bulls get the earnings news they're looking for, then shares of SHLD could easily jump sharply higher post-earnings as the bears rush to cover some of their positions. From a technical perspective, SHLD is currently trending below its 200-day moving average and just above its 50-day moving average, which is neutral trendwise. This stock has been uptrending strong over the last two months, with shares moving higher from its low of $24.10 to its recent high of $48.25 a share. During that uptrend, shares of SHLD have been making mostly higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of SHLD within range of triggering a near-term breakout trade post-earnings. If you're bullish on SHLD, then I would wait until after its report and look for long-biased trades if this stock manages to break out above its 200-day at $36.47 to some more near-term overhead resistance at $40.33 with high volume. Look for volume on that move that hits near or above its three-month average action of 1.84 million shares. If that breakout materializes post-earnings, then SHLD will set up to re-test or possibly take out its next major overhead resistance levels at $48.25 to $54.69 a share. I would avoid SHLD or 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 $34.50 to its 50-day at $32.79 a share and then below more support at $32.13 a share with high volume. If we get that move, then SHLD will set up to re-test or possibly take out its next major support levels at $28 to $26 a share. Must Read: 10 Stocks Carl Icahn Loves in 2014 Bob Evans Farms Another earnings short-squeeze prospect is full-service restaurant player Bob Evans Farms , which is set to release numbers on Tuesday after the market close. Wall Street analysts, on average, expect Bob Evans Farms to report revenue of $343.52 million on earnings of 33 cents per share. The current short interest as a percentage of the float for Bob Evans Farms is extremely high at 17.6%. That means that out of 19.04 million shares in the tradable float, 3.36 million shares are sold short by the bears. This is a large short interest on a stock with a very small tradable float. Any bullish earnings news could easily set off a big short-squeeze for shares of BOBE post-earnings. From a technical perspective, BOBE 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 three months, with shares moving higher from its low of $41.74 to its recent high of $55.59 a share. During that uptrend, shares of BOBE have been consistently making higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of BOBE within range of triggering a near-term breakout trade post-earnings. If you're bullish on BOBE, then I would wait until after its report and look for long-biased trades if this stock manages to break out above its 52-week high at $55.59 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 401,177 shares. If that breakout develops post-earnings, then BOBE will set up to enter new 52-week-high territory, which is bullish technical price action. Some possible upside targets off that breakout are $60 to $65 a share, or even $70 a share. I would simply avoid BOBE 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 around $52 to $51.03 a share with high volume. If we get that move, then BOBE will set up to re-test or possibly take out its next major support levels at its 50-day moving average of $49.34 to its 200-day moving average of $47.53 a share, or even more support at $45 a share. Must Read: 10 Stocks Billionaire John Paulson Loves in 2014 Barnes & Noble My final earnings short-squeeze play is content, commerce and technology player Barnes & Noble , which is set to release numbers on Thursday before the market open. Wall Street analysts, on average, expect Barnes & Noble to report revenue of $1.69 billion on 31 cents per share. The current short interest as a percentage of the float for Barnes & Noble is extremely high at 17.8%. That means that out of the 40.96 million shares in the tradable float, 7.29 million shares are sold short by the bears. This is a large short interest on a stock with a relatively low tradable float. Any bullish earnings news could easily spark a big short-squeeze for shares of BKS post-earnings. From a technical perspective, BKS is currently trending above both its 50-day and 200-day moving averages, which is bullish. This stock has been uptrending over the last two months, with shares moving higher from its low of $17.90 to its recent high of $24.24 a share. During that uptrend, shares of BKS have been consistently making higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of BKS within range of triggering a big breakout trade post-earnings. If you're in the bull camp on BKS, then I would wait until after its report and look for long-biased trades if this stock manages to break out above some key overhead resistance levels at $24.24 to its 52-week high at $24.62 a share with high volume. Look for volume on that move that registers near or above its three-month average action of 682,683 shares. If that breakout kicks off post-earnings, then BKS will set up to enter new 52-week-high territory above $24.62 a share, which is bullish technical price action. Some possible upside targets off that breakout are $30 to $35 a share. I would avoid BKS 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 moving average of $21.03 to its 200-day moving average of $20.48 a share with high volume. If we get that move, then BKS will set up to re-test or possibly take out its next major support levels at $19 to $18 a share, or even $16 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. Must Read: Warren Buffett's Top 10 Dividend Stocks Follow Stockpickr on Twitter and become a fan on Facebook. 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 http://ift.tt/19UMVdH or @zerosum24.
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