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.
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 very bullish technically 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.
Unites States Steel
The current short interest as a percentage of the float for U.S. Steel is extremely high at 39.5%. That means that out of the 145.5 million shares in the tradable float, 57.56 million shares are sold short by the bears. If the bulls get the earnings news they're looking for, then shares of U.S. Steel could easily soar sharply higher as the bears move fast to cover some of their positions.
From a technical perspective, U.S. Steel is currently trending below both its 50-day and 200-day moving averages, which is bearish technical price action. This stock has been downtrending badly over the last five months and change, with shares falling sharply off their high of $17.64 to their recent low of $6.43 a share. During that downtrend, shares of United States Steel have been making mostly lower highs and lower lows, which is bearish technical price action. That said, this stock has now started to rebound off that $6.43 low, and it's quickly moving within range of triggering a near-term breakout trade post-earnings.
If you're bullish on U.S. Steel, 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 its 20-day moving average of $7.53 to $7.80 a share and then above its 50-day moving average of $8.09 to $8.25 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 10.55 million shares. If that breakout materializes post-earnings, then this stock will set up to re-test or possibly take out its next major overhead resistance levels at $9.58 to $10.17, or even $11 a share.
I would simply avoid U.S. Steel or look for short-biased trades if after earnings it fails to trigger that breakout and then drops back below its new 52-week low of $6.43 a share with high volume. If we get that move, then this stock will set up to enter new 52-week-low territory, which is bearish technical price action.
Navient
Another potential earnings short-squeeze trade idea is credit services player Navient (NAVI - Get Report) , which is set to release numbers on Tuesday after the market close. Wall Street analysts, on average, expect Navient to report revenue $460.2 million on earnings of 49 cents per share.
From a technical perspective, Navient is currently trending below both its 50-day and 200-day moving averages, which is bearish. This stock has been downtrending over the last two months, with shares moving lower off their high of $12.95 to their recent low of $8.29 a share. During that downtrend, shares of Navient have been making mostly lower highs and lower lows, which is bearish technical price action. That said, this stock has now started to bounce off its new 52-week low of $8.29 a share, and it's quickly moving within range of triggering a big breakout trade post-earnings.
If you're in the bull camp on Navient, 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 $9.59 a share high volume. Look for volume on that move that hits near or above its three-month average volume of 4.77 million shares. If that breakout kicks off post-earnings, then this stock will set up to re-test or possibly take out its next major overhead resistance levels at its 20-day moving average of $10.28 to its 50-day moving average of $11.29 a share.
I would simply avoid Navient or look for short-biased trades if after earnings it fails to trigger that breakout and then drops back below its new 52-week low of $8.29 a share with high volume. If we get that move, then this stock will set up to enter new 52-week-low territory, which is bearish technical price action.
Swift Transportation
Another potential earnings short-squeeze candidate is multi-faceted transportation player Swift Transportation (SWFT -Get Report) , which is set to release numbers on Monday after the market close. Wall Street analysts, on average, expect Swift Transportation to report revenue of $1.12 billion on earnings of 47 cents per share.
The current short interest as a percentage of the float for Swift Transportation is very high at 26.6%. That means that out of the 89.24 million shares in the tradable float, 23.78 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 1.9%, or by about 452,000 shares. If the bears get caught pressing their bets into a strong quarter, then this stock could easily spike sharply higher as the bears move fast to cover some of their positions.
From a technical perspective, Swift Transportation 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 five months, with shares falling sharply off their high of $20.62 to their recent low of $11.74 a share. During that downtrend, shares of Swift Transportation have been making mostly lower highs and lower lows, which is bearish technical price action. That said, this stock has now started to rebound off that $11.74 low, and its quickly moving within range of triggering a big breakout trade above some key near-term overhead resistance levels.
If you're bullish on Swift Transportation, 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 $14.25 to $14.60 a share with high volume. Look for volume on that move that registers near or above its three-month average action of 3.09 million shares. If that breakout triggers post-earnings, then this stock will set up to re-test or possibly take out its next major overhead resistance levels at $16.45 to $17.63, or even $19 a share.
I would avoid Swift Transportation or look for short-biased trades if after earnings it fails to trigger that breakout and then drops back below its 20-day moving average of $13.36 a share with high volume. If we get that move, then this stock will set up to re-test or possibly take out its next major support levels at $12 to its 52-week low of $11.74 a share.
Cliffs Natural Resources
The current short interest as a percentage of the float for Cliffs Natural Resources is extremely high at 41.7%. That means that out of 139.56 million shares in the tradable float, 58.22 million shares are sold short by the bears. If the bulls get the earnings news they're looking for, then shares of Cliffs Natural Resources could easily explode sharply higher as the bears move fast to cover some of their trades.
From a technical perspective, Cliffs Natural Resources 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 five months, with shares falling off their high of $4.53 to their recent low of $1.20 a share. During that downtrend, shares of Cliffs Natural Resources have been consistently making lower highs and lower lows, which is bearish technical price action. That said, this stock has now started to rebound off that $1.20 low, and it's beginning to trend within range of triggering a big breakout trade post-earnings.
If you're bullish on Cliffs Natural Resources, 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 $1.75 to $1.80 a share and then above its 50-day moving average of $1.94 a share with high volume. Look for volume on that move that registers near or above its three-month average volume of 4.54 million shares. If that breakout gets set off post-earnings, then this stock will set up to re-test or possibly take out its next major overhead resistance levels at $2.25 to $2.50 a share.
I would simply avoid Cliffs Natural Resources or look for short-biased trades if after earnings it fails to trigger that breakout and then drops back below its new 52-week low of $1.20 a share with high volume. If we get that move, then this stock will set up to enter new 52-week-low territory, which is bearish technical price action.
Flotek Industries
My final earnings short-squeeze trading opportunity is oil and gas equipment and services provider Flotek Industries (FTK - Get Report) , which is set to release numbers on Wednesday after the market close. Wall Street analysts, on average, expect Flotek Industries to report revenue of $85.65 million on earnings of 1 cent per share.
The current short interest as a percentage of the float for Flotek Industries is very high at 27.5%. That means that out of the 43.09 million shares in the tradable float, 11.88 million shares are sold short by the bears. If this company can deliver the earnings news the bulls are looking for, then shares of Flotek Industries could easily rip sharply higher post-earnings as the bears scramble to cover some of their positions.
From a technical perspective, Flotek Industries 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 three months, with shares falling sharply off their high of $12.10 to their recent low of $4.89 a share. During that downtrend, this stock has been consistently making lower highs and lower lows, which is bearish technical price action. That said, shares of Flotek Industries have now started to rebound off their new 52-week low of $4.89, and are quickly moving within range of triggering a big breakout trade post-earnings.
If you're in the bull camp on Flotek Industries, 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 $6.41 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 2 million shares. If that breakout develops post-earnings, then this stock will set up to re-test or possibly take out its next major overhead resistance levels at $8 to its 20-day moving average of $8.94, or even $10 a share.
I would avoid Flotek Industries or look for short-biased trades if after earnings it fails to trigger that breakout, and then drops back below its new 52-week low of $4.89 a share with high volume. If we get that move, then this stock will set up to enter new 52-week-low territory, which is bearish technical price action.
By Roberto Pedone
Source:http://www.thestreet.com/story/13434470/1/5-hated-stocks-you-should-love-this-earnings-season.html?kval=dontmiss
No comments:
Post a Comment