What is a consolidation? Definition and example

Consolidation breakout as seen on the S&P CNX NIFTY Future
Consolidation breakout as seen on the S&P CNX NIFTY Futures

The term “consolidation” in technical analysis implies an asset’s oscillation between a predetermined set of trading ranges. After a period of indecisiveness, the asset’s price rises up or down trading patterns to terminate consolidation. 

According to financial accounting, consolidation is a series of reports which portrays a parent business and its subsidiaries as one entity.

Understanding consolidations:

Consolidation zones Bitcoin / TetherUSD
Consolidation zones Bitcoin / TetherUS

For every period, price charts may show phases of consolidation, which can extend for days, weeks, or even months. Support and resistance levels on price charts are used by technical traders to determine whether to buy or sell. 

Breaking a consolidation pattern may occur for several different causes, including the announcement of substantially relevant information and subsequent limit orders being triggered.

Why does consolidation matter?

Two woman analyzing consolidation

Consolidation is fueled in part by the economies of scale that may be achieved via mergers. To achieve considerable cost savings and revenue synergies, combined firms might consolidate their existing operational frameworks and decrease overlap. In addition to acquiring a bigger client base, an enlarged geographic footprint, and a more diverse product offering, a corporation may decide to buy out a competitor for a variety of additional reasons.

An industry’s balance of power is shifted when one or a few corporations control a major percentage of the industry. Mergers and acquisitions (M&A) might alter the competitive environment, so investors should think carefully before making a decision.

Consolidation: Support vs. resistance

Support and resistance in trading

During a consolidation phase, the asset’s bottom and upper boundaries serve as support and resistance levels. The price pattern’s upper and lower ends are represented by resistance and support levels, respectively.

Volatility soars and short-term traders have a better chance of making money as the price breaks through the previously determined support and resistance levels. 

A breakthrough above resistance is seen as a sign that the price will continue to rise, so the trader buys. However, if the price breaks under the support level, the trader exits the position and exits the market.

An example of consolidation

Consolidation ranges Bitcoin / USD
Consolidation ranges Bitcoin / USD

Consider the following scenario: XYZ Corporation purchases 100% of ABC Manufacturing’s net assets for $1 million, and ABC’s net assets have a reasonable market worth of $700,000. 

Consolidated financial statements indicate ABC’s assets at $700,000 and account for a goodwill asset of $300,000 that was paid more than the fair market valuation.

Conclusion

Accounting for the financial components of a branch’s income and costs, as well as its cash flows, liabilities, and profits or losses is consolidated. Underneath the consolidation technique, the accounting statement blends the financial inputs of the parent company and its subsidiaries with the required deletion of entries to prevent a repetition of data.

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