Here is the only way to apply a cross fade between two clips in Windows Movie Maker.
One of the most enduring transitions from the classic film age is that of the cross fade. This fade is when one clip fades directly into another without going to black. The cross fade often connotes a certain amount of time has passed although the topical focus may be the same. This transition is usually one of the standard transition options in non-linear video editing software, but Windows Movie Maker does not include it on the menu. Instead you have to approach it completely different, but it gives you a little more control on how you want it to end up appearing.
Windows Movie Maker Method
If you want to do a cross fade of sorts in Windows Movie Maker you start with two clips side by side in the Timeline. Select the second one and begin dragging it to the left into the area inhabited by the first clip. When you start doing this you will notice a blue bar appearing at the bottom of the clip with gradual inclines on each end that meet to the plateau in the middle. As you begin dragging it over more you see that the incline on the left hand side begins to be longer and the plateau begins to shrink. This indicates the period of time where the first clip is still present and the second clip begins to take over. The plateau is when the second clip is finally the only one on screen. Once you have reached the period of time in the middle where you want the first clip to fade into the second you can let go and you will see a middle box where the two overlap. That period of time is the entire period for the cross fade. If you are going to go for standard transition times you will maintain that period of time as going from 1 to 1.75 seconds. The longer the transition the more profound difference between the two scenes as interpreted by the audiences.
Though it may seem natural to also use this technique if you want a photo or video clip to just rise up in the middle of another clip where it also dissipates in the same clip you will have trouble doing that in this situation. This technique is best used when just transitioning from one clip to another, as long as it is not over used or exaggerated.