Introduction to consolidation
In technical analysis, consolidation is referred to the time period when a stock does not cross its support and resistance lines. Instead, the stock movement sticks to a well defined pattern that doesn’t rise over its previous high price, or doesn’t fall under its recent lowest price in the past. This range between support and resistance lines is induced by trader indecisiveness or some stagnation due to various factors. In accounting, consolidation occurs when financial statements of a parent company and its subsidiary are presented as one.
Understanding Consolidation
- Consolidation can be plotted on a price chart between the resistance and support lines. Resistance line refers to the top end of the price trend, while support forms the lower end of the price pattern. Consolidation may persist for days, weeks or months, and the major breakthrough is heavily speculated. When the stock breaks the support line, the price is declining and thus traders sell, and when the resistance breaks, the price is climbing.
- In accounting, consolidation is made to join subsidiaries with their parent companies and present a broader view of the financial status. The differences are adjusted using the goodwill account, and only accounts transactions made with third parties instead of between the stakeholders of the subsidiary and the parent.
Highlights of Consolidation
- A consolidation occurs within a range, and this movement is often called a ‘sideways trend.’
- Determining the range is often difficult because the stock needs time to hit its highest or lowest, and the breakthrough is difficult to predict unless the range is set.
- Consolidation is a stock trend which generally signals the coming of a major change in the stock or the company. Market indecisiveness may occur due to net zero information surrounding the company that corridors the price of its stock.
- The range can also be triggered after volatile price fluctuation, which is now the time where the investors are absorbing the information that pushed the fluctuation.
