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.
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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, let's take a look at several stocks that could experience big short squeezes when they report earnings this week.
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Netflix
My first earnings short-squeeze trading opportunity is Internet television networking leader Netflix (NFLX - Get Report), which is set to release numbers on Wednesday after the market close. Wall Street analysts, on average, expect Netflix to report revenue of $1.57 billion on earnings of 69 cents per share.
From a technical perspective, NFLX is currently trending above both its 50-day and 200-day moving averages, which is bullish. This stock has been uptrending over the last few weeks, with shares moving higher from its low of $409.25 to its recent high of $454.97 a share. During that uptrend, shares of NFLX have been making mostly higher lows and higher highs, which is bullish technical price action.
If you're bullish on NFLX, 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 $470 to $486.50 a share and then above its all-time high at $489.29 a share with high volume. Look for volume on that move that registers near or above its three-month average action of 2.28 million shares. If that breakout hits post-earnings, then shares of NFLX will set up to enter new all-time high territory, which is bullish technical price action. Some possible upside targets off that mover are $500 to $510, or even $515 a share.
I would simply avoid NFLX 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 $446.36 a share and then below $440 a share with high volume. If we get that move, then NFLX will set up to re-test or possibly take out its next major support levels at its 200-day moving average of $418.92 a share to $409.25 a share.
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Triangle Petroleum
Another potential earnings short-squeeze trade idea is independent oil and gas player Triangle Petroleum (TPLM - Get Report), which is set to release its numbers on Monday after the market close. Wall Street analysts, on average, expect Triangle Petroleum to report revenue $153.58 million on earnings of 5 cents per share.
From a technical perspective, TPLM is currently trending just above its 50-day moving average and below its 200-day moving average, which is neutral trendwise. This stock has been consolidating and trending sideways over the last two months, with shares moving between $4.56 on the downside and $5.99 on the upside. Any high-volume move above the upper-end of that range post-earnings could trigger a big breakout trade for TPLM.
If you're in the bull camp on TPLM, 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 $5.99 to $6.20 a share with high volume. Look for volume on that move that registers near or above its three-month average volume of 1.49 million shares. If that breakout begins post-earnings, then TPLM will set up to re-test or possibly take out its next major overhead resistance levels at $7.40 to $7.75 a share, or even $8.26 to $9 a share.
I would simply avoid TPLM 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 $5.23 a share and then below more support at $5 a share with high volume. If we get that move, then TPLM will set up to re-test or possibly take out its next major support levels at $4.56 to $4 a share, or even $3.90 a share.
Bank of the Ozarks
Another potential earnings short-squeeze candidate is regional banking player Bank of the Ozarks (OZRK - Get Report), which is set to release numbers on Monday after the market close. Wall Street analysts, on average, expect Bank of the Ozarks to report revenue of $111.42 million on earnings of 42 cents per share.
The current short interest as a percentage of the float for Bank of the Ozarks stands at 7.9%. That means that out of the 77.80 million shares in the tradable float, 6.18 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 for shares of OZRK post-earnings if the bulls get the earnings news they're looking for.
From a technical perspective, OZRK 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 and change, with shares moving higher from its low of $32.42 to its recent high of $37.96 a share. During that uptrend, shares of OZRK have been making mostly higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of OZRK within range of triggering a big breakout trade post-earnings.
If you're bullish on OZRK, then I would wait until after its report and look for long-biased trades if this stock manages to break out some key near-term overhead resistance levels at $37.80 to $37.96 a share and then above its 52-week high of $38.22 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 537,527 shares. If that breakout develops post-earnings, then OZRK will set up to enter new 52-week-high territory, which is bullish technical price action. Some possible upside targets off that move are $45 to $50 a share.
I would avoid OZRK 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 $36.23 a share and then below more near-term support at $35.83 a share with high volume. If we get that move, then OZRK will set up to re-test or possibly take out its next major support levels at its 200-day moving average of $34.17 to $32.42 and $32.35 a share.
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SanDisk
Another earnings short-squeeze prospect is data storage solutions provider SanDisk (SNDK - Get Report), which is set to release numbers on Wednesday after the market close. Wall Street analysts, on average, expect SanDisk to report revenue of $1.3 billion on earnings of 66 cents per share.
From a technical perspective, SNDK is currently trending below both its 50-day and 200-day moving averages, which is bearish. This stock recently gapped down sharply lower from $85 a share to close to $65 a share with heavy downside volume. Volume that gap-down, shares of SNDK have rebounded sharply off its low of $63 a share to its recent high of $71.24 a share.
If you're bullish on SNDK, then I would wait until after its report and look for long-biased trades if this stock manages to break out above that recent high of $71.24 a share (or above Wednesday's intraday high if greater) with high volume. Look for volume on that move that hits near or above its three-month average volume of 5.57 million shares. If that breakout gets started post-earnings, then SNDK will set up to re-fill some of its previous gap-down-day zone that started at $85 a share. Some possible targets are its 50-day moving average of $77.81 to $85 a share.
I would simply avoid SNDK 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 $67 to $65 a share and then below that recent low of $63 a share with high volume. If we get that move, then SNDK will set up to enter new 52-week-low territory below $63 a share, which is bearish technical price action. Some possible downside targets off that move are $55 to $50 a share.
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Fastenal
My final earnings short-squeeze play is wholesale distributor of industrial and construction supplies player Fastenal (FAST - Get Report), which is set to release numbers on Tuesday before the market open. Wall Street analysts, on average, expect Fastenal to report revenue of $956.74 million on earnings of 41 cents per share.
From a technical perspective, FAST 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 $48.13 to its recent low of $39.46 a share. During that downtrend, shares of FAST have been making mostly lower highs and lower lows, which is bearish technical price action.
If you're in the bull camp on FAST, 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 $41.92 a share with high volume. Look for volume on that move that registers near or above its three-month average action of 3.35 million shares. If that breakout takes hold post-earnings, then FAST will set up to re-test or possibly take out its next major overhead resistance levels at $43.50 to its 200-day moving average of $44.21 a share. Any high-volume move above those levels will then give FAST a chance to tag $46 to $47 a share.
I would avoid FAST or look for short-biased trades if after earnings it fails to trigger that breakout, and then drops back below its 52-week low of $39.46 a share with volume. If we get that move, then FAST will set up to re-test or possibly take out its next major support levels at $37.80 to $35.21 a share, or even $30 a share.
By Roberto Pedone
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