Understanding Consolidation in Finance: A Guide to Technical Analysis

What Is Consolidation?

In technical analysis, consolidation means an asset's price moves back and forth within set trading levels. Consolidation typically shows market indecisiveness and ends when the asset's price breaks out from the pattern. Traders use consolidation patterns to make buy and sell decisions.

Consolidation is a component of both technical analysis and accounting. Support and resistance levels play an important role in technical analysis for understanding price movements. In financial accounting, consolidation means showing a parent and subsidiary company as a single entity in financial statements.

Exploring Market Consolidation Patterns

Consolidation periods can appear in price charts for any timeframe, lasting days, weeks, or months. Technical traders identify support and resistance levels in in charts to decide when to buy or sell. A consolidation pattern could be broken for several reasons, such as the release of materially important news or the triggering of a succession of limit orders.

Defining Support and Resistance Levels in Consolidation

An asset's price limits form the support and resistance levels in a consolidation pattern. The resistance level is the top of the price pattern; the support level is the bottom.

When the price breaks past support or resistance, volatility rises, increasing profit opportunities for short-term traders. Technical traders believe a breakout above resistance means the price will climb further, so the trader buys. On the other hand, a breakout below the support level indicates the price is falling even lower, and the trader sells.

Financial Accounting Consolidation Explained

In financial accounting, consolidated financial statements are used to present a parent and subsidiary company as one combined company. A parent company may own a majority percentage of a subsidiary, with a non-controlling interest (NCI) owning the remainder. Or the parent may own the entire subsidiary, with no other firm holding ownership.

To make consolidated statements, adjust the subsidiary's assets and liabilities to fair market value for the combined financials. If the purchase price exceeds fair market value, the extra amount becomes a goodwill asset, gradually recorded as an expense.

A consolidation eliminates any transactions between the parent and the subsidiary, or between the subsidiary and the NCI. The consolidated financials only include transactions with third parties, and each of the companies continues to produce separate financial statements.

Practical Example of Financial Statement Consolidation

Assume XYZ Corp. buys 100% of the net assets of ABC Manufacturing for $1 million, and the fair market value of ABC’s net assets is $700,000. When an accounting firm puts together the consolidated financial statements, ABC’s net assets are listed with a value of $700,000, and the $300,000 amount paid above the fair market value is posted to a goodwill asset account.

The Bottom Line

Consolidation is a key term in technical analysis, describing how an asset's price oscillates within a set range due to market indecisiveness. Periods of consolidation offer technical traders opportunities to strategize around support and resistance levels, which are crucial for predicting potential breakout points. A price breakout beyond resistance or support could lead to increased volatility and opportunities for short-term gains.

In financial accounting, consolidation involves combining financial statements of a parent and subsidiary to present them as one company, adjusting for fair market value and accounting for goodwill.