Sell Apple, Buy Microsoft

This column was originally published on RealMoney on June 6 at 12:02 p.m. EDT. It's being republished as a bonus for TheStreet.com readers. For more information about subscribing to RealMoney, please click here.

Apple(AAPL Quote) has won the hearts and minds of the younger generation in recent years, with its ubiquitous iPod opening the door to market share gains for its less popular desktop computers. Rival Microsoft(MSFT Quote) has responded with the Zune, an odd device trying to challenge the iPod's near monopoly on teenage coolness.

Of course, the Zune will never threaten the iPod's sales dominance, but you can't fault Microsoft for trying. Indeed, the company has been in the knock-off business for generations, trying to mimic the best ideas of other companies rather than use originality or creativity to book its immense profits.

It's no secret that Apple's stock has wiped the floor with Microsoft's shares in recent years. While the pride of Redmond, Wash., is still trading within the narrow boundaries of a six-year range, Steve Jobs' garage project has marched up to all-time highs. And Apple has gone absolutely ballistic this quarter, ahead of the late-June release of its long awaited iPhone.

So now is the perfect time to sell Apple and buy Microsoft.

Say what?

Why would I recommend exchanging a rocket ship for a pellet gun? Let's put it this way: It's likely that Microsoft will outperform Apple by a wide margin in the next six to 12 months. As I'll point out in my chart review, Apple may be nearing the end of its fabulous rally while Microsoft is on the verge of a multiyear breakout.

Before I get hate mail, let me point out that I've been an Apple bull for many months. Last December I predicted the current breakout while taking a dim view of Microsoft's 2007 prospects. That bearishness hit the mark, considering that Mr. Softee is trading just two points higher than on the day that column was published.

But things have changed considerably since that time. Recent price action points to a major sell-the-news reaction when Apple's iPhone is finally released. On the other hand, Microsoft shares are nearing price levels that could support a sharp thrust to higher ground. Let's see how this is all playing out in the long-term price patterns.

Apple's weekly chart shows a powerful uptrend that began at the 2003 low. The stock rocketed higher in two sharp rally waves that carried price into the upper $80s by the start of 2006. It entered a deep correction at that time, retracing almost half of its three-year gains. The July low was the inception point for the current uptrend.

The three distinct rally waves follow the rules of an Elliott five-wave pattern that is nearing completion. The current parabolic run is common behavior for the fifth and final wave of this classic pattern. But there's good and bad news here; the latest rally shows the possibility of a final upside thrust before the broad uptrend finally peters out.

For Elliott aficionados, it looks like the current rally leg is ending the third of a fifth wave that will yield a deep correction back to round number $100, where a final thrust above the current highs might begin later this year. For the time being, however, Apple shareholders need to decide where and when to lock in profits.

The $124 level shows up repeatedly in Fibonacci extensions and measured move targets on this pattern. The recent high hit $122.17. This number could fulfill the top, or there may be another thrust that finishes up the pattern. With the iPhone release just a few weeks away, everything is moving right on schedule for traders to sell that event aggressively.

We need to go back many years in order to place current Microsoft price action in proper context. The stock fell sharply in 2000 when the bubble burst, but bottomed out two years ahead of the broad market. It then entered a massive sideways pattern, with support below $20 and resistance in the low $30s.