In technical analysis, the term “consolidation” refers to an asset oscillating between a set of trading ranges. Following a period of indecision, the asset’s price rises up or down in trading patterns to end consolidation.
Consolidation, in financial accounting, is a series of reports that portrays a parent company and its subsidiaries as one entity.
Price charts for any period may show phases of consolidation that can last days, weeks, or even months. Technical traders use price chart support and resistance levels to determine whether to buy or sell.
Breaking a consolidation pattern can occur for a variety of reasons, including the announcement of significantly relevant information and the subsequent activation of limit orders.
Why is consolidation important?
Consolidation is fueled in part by the economies of scale that mergers can achieve. To achieve significant cost savings and revenue synergies, combined firms may consolidate and reduce overlap in their existing operational frameworks. A corporation may decide to buy out a competitor for a variety of reasons other than expanding its client base, expanding its geographic footprint, and diversifying its product offering.
When one or a few corporations control a significant portion of an industry, the balance of power shifts.
Mergers and acquisitions (M&A) may alter the competitive landscape, so investors should exercise caution before making a decision.
Support vs. Resistance in Consolidation
During a consolidation phase, the bottom and upper boundaries of the asset serve as levels of support and resistance. The upper and lower ends of the price pattern are represented by resistance and support levels, respectively.
Short-term traders have a better chance of profiting as the price breaks through previously determined support and resistance levels.
A break above resistance is interpreted as a sign that the price will continue to rise, so the trader purchases. If the price falls below the support level, the trader closes the position and exits the market.
Consolidation in action
Consider the following example: XYZ Corporation pays $1 million for 100% of ABC Manufacturing’s net assets, which have a reasonable market value of $700,000.
ABC’s assets are valued at $700,000 in the consolidated financial statements, which include a $300,000 goodwill asset that was paid more than the fair market value.
Consolidated accounting is used to account for the financial components of a branch’s income and costs, as well as its cash flows, liabilities, and profits or losses. Underneath the consolidation technique, the accounting statement combines the parent company’s and its subsidiaries’ financial inputs with the required deletion of entries to avoid data repetition.