Dow theory

Okay kiddo, let's talk about Dow theory. This is a way of understanding how the stock market works.

Imagine you're playing with toys and you have two different kinds of blocks: red blocks and blue blocks. Sometimes you might notice that if you play with more red blocks, your towers go higher. Other times, if you play with more blue blocks, your towers go higher. That's a bit like how the stock market works – sometimes certain types of stocks go up, and other times different types of stocks go up.

Now, there were two smart men a long time ago named Charles Dow and Edward Jones. They wanted to figure out how to predict which types of stocks would go up or down. They studied thousands of stocks and noticed something interesting. They found that when one stock went up or down, it often meant that other stocks in the same group would also go up or down.

So they made something called the Dow theory, which is a way of looking at how different groups of stocks (like the red blocks and blue blocks) move together. They broke the stock market into two big groups: industrial stocks (like companies that make cars or airplanes) and railroad stocks (like companies that move things around on trains).

They noticed that the value of industrial stocks and railroad stocks tended to move in the same direction. If one went up, the other would usually go up too. But if one went down, the other would usually go down too. They called this the "Dow Jones Industrial Average" and the "Dow Jones Railroad Average." Those are just names for big groups of stocks.

Over time, other people noticed that sometimes the Dow Jones Industrial Average and Dow Jones Railroad Average might be moving in different directions for a while, but then they would start moving together again. So they started watching for when the two groups of stocks would start moving in the same direction again. They called that "confirmation."

Basically, the Dow theory is a way of looking at the stock market as a bunch of different groups of stocks, and trying to figure out when those groups will move up or down together. When a lot of different groups are moving in the same direction, that means the market is probably going up or down as a whole. And that's how Dow theory can help people understand what's happening in the stock market.