I've played through the game twice, and the first time I picked the blue tunic, second I picked the red. I couldn't really tell much of a difference since my gameboy is so old the color doesn't show up well anyway...but I do think the blue tunic would make more sense, considering you already have the level two sword. It depends on your style, I guess. I always run straight into the action, damage or not, so the extra defense was great for me!
I like the Red and Blue Tunic equally, it is just that Red is my favorite color, so I chose that color tunic first. Besides, you can easily change the tunic for the other one when you return to the Color Dungeon.
I Like getting the red tunic.
I always get it before completing the 3rd dungeon, so that means I don't have the L-2 sword yet.
I have gotten the blue tunic a couple times but I get the red out of habit.
I have always picked the red tunic.
red tunic plus piece of power= destruction
Not sure if the power stacks but I like to think so and thus I always choose red. I've chosen blue once and it was alright, but for my style of play red works out better.