“Hold your Russia, Korea and Indonesia and look to lighten up everywhere else.”

Aug. 3 (Bloomberg) -- An “ominous” head-and-shoulders pattern has formed over the MSCI Emerging Markets Index, which may foreshadow declines that will take it to the lowest level in almost a year, according to Auerbach Grayson & Co.

Investors should sell stocks of developing nations except for Russia, South Korea and Indonesia, Richard Ross, global technical strategist at Auerbach Grayson, said in a note to clients dated July 29. The emerging-markets gauge dropped 1.8 percent to 1,126.97 yesterday, the most in three weeks. A weekly close below the 50-week moving average at 1,120 could “set the stage for a fast move down to 1,043,” Ross said. The MSCI measure plunged as much as 58 percent after breaking below the 50-week average in June 2008.

“An ominous rolling head-and-shoulders top has formed over the emerging markets,” said Ross. “Hold your Russia, Korea and Indonesia and look to lighten up everywhere else.”

Ross, who is based in New York, said on Jan. 27 that Indonesia’s benchmark stock index may rise 18 percent after slumping to a key Fibonacci support level. The measure has since climbed 19 percent, closing at a record high on Aug. 1.

The emerging-markets gauge has fallen 2.7 percent this year, compared with a 1.2 percent slump in the MSCI World Index, on concern accelerating inflation in countries from China to India will spur more increases in interest rates, curbing economic growth. The MSCI index closed below 1,043 in September 2010.

A head-and-shoulders formation is three highs, with the middle peak rising above two roughly equal outside peaks. The middle peak, or crown, occurred in April, while the two shoulders formed in January and July, according to data compiled by Bloomberg.

Credit Suisse

The Jakarta Composite Index has rallied 13 percent this year, the most among Asia’s benchmark stock gauges, while Russia’s dollar-denominated RTS Index gained 10 percent. South Korea’s Kospi index has climbed 0.7 percent.

Credit Suisse Group AG cut its equity allocations for Indonesia and Thailand stocks in its global emerging-markets portfolio, while adding equities in China, South Korea, Hong Kong and Taiwan, according to an Aug. 1 report. Thailand’s SET Index has advanced 10 percent this year, surging to a 15-year high on Aug. 1.

In technical analysis, investors study charts of trading patterns and prices to predict changes in a security.