Toggling between the crosshairs and the normal brush is done with the Caps Lock key.
To create the distortion you want, try Edit > Transform > Warp. Set the Warp type to Arch. Drag the handle that appears in the top middle of your object to adjust the warp. Unfortunately, that won't quite make the edges work out, so you may wish to change to Custom in order to adjust the corners to make it appear more round.