I've been wondering about this too for a while. A couple of the things that I've heard said about what tape reading is supposed to be:
1) It's looking to spot the tracks of the smart money, the big players that move a stock.
2) It's not just looking at the T & S for a particular stock, it's looking at the T & S for a group of related stocks and figuring out what's going to happen by looking at how they move in accordance with each other.
As far as (1) goes, I'm not sure exactly how one is supposed to detect the tracks of the smart money. One idea I've come across is that you can tell what the smart money is doing by looking at the the volume. For example, when insiders want to accumulate a stock, they do so quietly, so that others don't catch on to what they're doing. So the volume in this situation is relatively steady without any big spikes, and price rises steadily. After the public has seen the stock rise for a while, they start buying it, volume increases, and eventually there is a huge price spike along with a volume spike and at this point the insiders have dumped their shares.
The idea expressed in (2) is basically that stocks in a particular sector tend to rise and fall together, regardless of the actual worth of the individual companies. I think that the key notion though is that some stocks are leaders in a sector and that the other stocks tend to follow them. I came across this in Richard Wyckoff's book
The Day Trader's Bible. I haven't finished it yet so I couldn't give you much more information on it. There is a Web site where you can download a PDF version of the book for free:
www.thedaytradersbible.com
