Consolidation in technical analysis refers to an asset oscillating between a well-defined pattern of trading levels. It signifies market indecisiveness, concluding when the asset’s price navigates away from the trading pattern. On the other hand, in financial accounting, consolidation presents a combined view of a parent company and its subsidiary.
Key Takeaways
- Consolidation signifies a stock’s price movement within a specific support and resistance range over time.
- It typically results from trader indecisiveness before breaking out due to significant news or a series of limit orders.
- Consolidated financial statements evaluate parent and subsidiary companies as a single entity.
Delving into Market Consolidation
Market consolidation periods are observable in price charts for varying time frames, lasting days to months. Technical traders analyze support and resistance levels in these charts to guide their buy and sell decisions. A pattern’s termination could arise from impactful news releases or a sequence of limit orders.
Support vs. Resistance in Consolidation Patterns
An asset’s price bounds define the support and resistance levels. The resistance level marks the upper limit, whereas the support level indicates the lower bound. Upon breaking these levels, volatility spikes, creating ample opportunities for short-term profit for traders.
In such cases, technical traders anticipate further price hikes when resistance is broken, prompting purchases. Conversely, a drop below the support level signals further decline, prompting sales.
The Role of Consolidation in Accounting
In the realm of accounting, consolidated financial statements amalgamate the financials of a parent and subsidiary firm, presenting them as a unified entity. A parent company may own the majority or entirety of a subsidiary, leaving the rest to non-controlling interests (NCI).
When creating consolidated financial statements, the subsidiary’s assets and liabilities are adjusted to fair market value, which is reflected in the combined financial records. Any excess amount paid by the parent beyond the fair market value of the net assets is categorized under goodwill, transitioning to an expense account over time.
Furthermore, any transactions between parent, subsidiary, or NCI are eliminated in the consolidated reports, emphasizing interactions with third parties. Nonetheless, each entity also generates individual financial statements.
Practical Example of Accounting Consolidation
Assume XYZ Corporation acquires 100% of ABC Manufacturing’s net assets for $1 million, whereas ABC’s net assets have a fair market valuation of $700,000. In this case, the consolidated financial statements list ABC’s net assets at $700,000 while the $300,000 excess is assigned to a goodwill asset account.
Related Terms: technical analysis, asset, support, resistance, volatility.
