What's wrong with Microsoft (MSFT) - Get Report, and why has the tech giant performed so poorly in the last decade?

Sadly, there's a simple answer. Whether it's hawking the latest version of an operating system stuffed with outdated code or chasing smarter competitors with mediocre knockoffs (think Zune or Bing), the "pride of Redmond" invariably lacks the two defining features necessary to be counted among tech's best of breed: true innovation and risk-taking.

The company's troubles began more a decade ago when it was sued by the U.S. government for allegedly being involved in anti-competitive practices in violation of the Sherman Act. European regulators picked up that theme and, by the turn of the millennium, it appeared as if the entire world was attacking Microsoft for the cancerous nature of its operating system and the tight bundling of its Internet browser.

While those issues have since been resolved through a series of fines, promises and unbundling, Microsoft has failed in its numerous attempts to branch out into other venues. Hence, the company has had trouble recapturing the profits it lost from no longer being able to buy out its competition or incorporate parallel functions into new versions of Windows.

Of course, there have been successes along the way, including Xbox and the Office software suite, but company executives still fail to comprehend what millions of users worldwide already know -- that future growth demands a radical change in corporate culture that would give Microsoft's worker bees the freedom to create products that aren't already sold by more innovative companies such as

Apple

(AAPL) - Get Report

and

Google

(GOOG) - Get Report

.

Microsoft (MSFT) -- Monthly Source: eSignal

The long-term Microsoft chart shows how the late 1990s anti-trust activities killed a remarkable uptrend. The stock rose steadily between 1987 and the turn of the millennium, with price splitting eight times and jumping from $0.08 to nearly $54 (post-split), finally topping out on the next-to-last trading day of 1999.

The stock completed a four-month topping pattern and sold off to a two-year low at $18.06 in December 2000. It popped up to $34.16 seven month later and spent the next six years trading in a narrow range between those two reference points (red lines). Price broke the range top during the 2007

Yahoo

(YHOO)

speculation and then collapsed, breaking the range bottom during the most recent bear market.

Ten years of price action shows an expanding range with absolutely no progress. This dead pattern has yielded a phenomenally bad investment for long-suffering shareholders (made bearable by a steady dividend). However, this is still a poorly performing instrument by any standard, given the dramatic growth of Microsoft's peers over the same time frame.

Microsoft (MSFT) -- Weekly Source: eSignal

Look how price has oscillated back and forth across the 200-week moving average since the initial decline in 2000. This is a mean reversion dynamic, in which price stretches away from a major moving average, like a rubber band. Sooner or later, pressure on the band gets too great and price snaps back to center, giving up the gain or loss that caused the tension.

The 200-week moving average stood at $27.12 on May 24, 2000. That's just $0.27 from Tuesday's closing price. It gets even worse. The current 200-week moving average resides at $26.06, which means it's basically unchanged in the last 10 years. Now get this: Microsoft's stock hasn't lifted above $24.75 or fallen below $28.25 (red lines) during this entire period.

Despite this flat-line activity, Wall Street analysts rekindle their love for Mr. Softee every time the company takes its next big step backwards. Remember all the hype ahead of Vista and Windows 7? How about the Yahoo takeover attempt? Now guess what? Here we go again with the Window Phone 7 trying to compete in the oversaturated smartphone market.

Microsoft (MSFT) -- Daily Source: eSignal

That said, Microsoft offers a steady flow of opportunities for position traders because its patterns have become so recognizable over the years. For example, I did well buying the stock after it broke the ten year range during the bear market, assuming that mean reversion would kick in and generate a snapback rally. That assumption was good for a 10-point gain in 2009.

Another good trade is setting up right now. The stock carved out a double top near $31.50 in the first quarter and sold off to an 11-month low in July. It then eased into a symmetrical-triangle-basing pattern that broke to the upside last week. The rally also lifted price above resistance at the 200-day moving average.

The uptick is pulling into double top resistance, where a counter wave is likely to take control. A pullback toward support (blue line) between $25.75 and $26 should offer an excellent buying opportunity for a rally that eventually tests the 2010 high. A one or two-week basing pattern near the current high, followed by a breakout over resistance at $27.75, should also offer a decent entry.

What kind of positive price action is required for Microsoft to finally reward its overly patient shareholders and get this stock back into the winning column? That's an easy answer -- but a very tough proposition. Watch $37.50 because that's the major inflection point (after a notable failure at that level in November 2007). A high-volume rally above that major barrier will finally allow price to escape from the endless sideways drift.

At the time of publication, Farley held no positions in the stocks mentioned.

Alan Farley is a private trader and publisher of

Hard Right Edge

, a comprehensive resource for trader education, technical analysis, and short-term trading techniques. He is also the author of

The Daily Swing Trade

, a premium product from TheStreet.com that outlines his charts and analysis. Farley has also been featured in

Barron's

,

SmartMoney

,

Tech Week

,

Active Trader

,

MoneyCentral

,

Technical Investor

,

Bridge Trader

and

Online Investor

. He has written two books:

The Master Swing Trader

and

The Master Swing Trader Toolkit: The Market Survival Guide

, due out in April. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks.

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