Long-awaited correction confronts Wall Street

By Ellis Mnyandu

NEW YORK (Reuters) - Wall Street's spring surge looks to be wilting in the heat, judging by the emergence of bearish chart patterns, anemic trading volumes and rising volatility.

For two months U.S. equities have defied expectations for a correction, but charts show that major averages are finally on the cusp of their first significant pullback since the start of the March rally due to worries about economic growth.

"This is a start of a correction," said John Kosar, market technician and president of Asbury Research in Chicago.

"The market has decided that for now the October 2007 cyclical downtrend is still in play. It doesn't mean we have to go back under the lows, although that is possible."

Analysts do not expect the benchmark S&P 500 .SPX to breach its 12-year closing low of 676.53 reached in March, but chart patterns suggest that in the next several weeks the broader market could pull back to at least April levels.

The S&P 500 has shed more than 7 percent from its recent recovery peak of early June, as it jumped nearly 40 percent from the low hit on March 9.

More alarming, according to some chartists, is the index's failure to break through its recent narrow range, leading to the emergence of a "head and shoulders" pattern -- a bearish technical signal.

The "head and shoulders" pattern is formed by an initial price peak followed by a higher second peak, and finally a third peak that falls in line with the first one.