First of all, "reading the tape" comes from tons of experience from sitting in front of the trading screens for many hours over many years! Experience cannot be taught in all honesty.
Having said that:
Here are some things i look for when a market's character is changing. First of all, let me explain what i mean when i use the term: "UNDER THE SURFACE". Think of it like this: When your car has a problem and you take it to your mechanic. The mechanic will never know what the problem is with your car unless he looks UNDER THE HOOD. Right?
After the mechanic looks and inspects UNDER THE HOOD, he slowly starts to spot possible problems and only after a thorough and detailed inspection under the hood after using various methods does he come to a conclusion of what could be troubling your car.
Picture the same thing with reading the tape while trading!
I like to think of myself as a 'blue collar' trader: I have a very simple system which in this new generation of technology could be considered 'old school'.
Every single day and through out the day, i scan for stocks that are either advancing on heavy volume, breaking to new 52 week highs, or tacking on high percentage gains. I track these stocks for many days and sometimes even weeks. I consider these "the leaders" at that particular point in time. I track and watch these stocks in my stockcharts.com watchlists. I have many lists and i track literally between 200-400 stocks. I am always looking for new candidates by adding and deleting new leaders. Do not think of it as the 'stock market' but as a 'market of stocks'. Stocks move the indexes. A lot of times, stocks either top out of bottom before the major indexes do. So watching how individual stocks are behaving is key to my system.
I need to know how my watchlist is progressing or not progressing. How leading stocks are moving is very important to the health of a market. If stocks are moving on strong higher and breakouts are seeing follow through, this is a very important development and quite bullish. Vice versa, if market leading stocks are starting to see some signs of heavy volume selling days(distribution), and lack to follow thru on breakouts(failed breakouts) then it's time to be cautious and raise some cash, tighten stop losses be very selective on how or when you enter new positions. Markets go up 'slowly' but they drop very quickly! Fear is a much stronger emotion greed. A stock could go up 20% in one month but it could drop 20% in a single day easily.
Market internals: meaning number of advancing versus declining issues. During a strong rally phase: Seeing: 3 advancing to 1 declining ratio, 4 advancing to 1 declining, 5 advancing to 1 declining, 6 advancing to 1 declining or more advancing versus declining stocks ratio is very healthy! Vice versa for bearish trends or bearish days.
During a rally phase or rally day. I wanna see how stocks 'UNDER THE SURFACE" are moving. If stocks under the surface, are moving very strongly on strong volume and intra day opportunities are plentiful, i.e.: 'easy' to spot and 'play', then i feel 'confident' in a rally's lasting powers. If however a rally looks good on 'paper' but intra day the action looks poor, i.e. light volume and/or sloppy with numerous failed intra day breakouts, then i become highly suspect of the rally and the 'under the surface' strength of the move cannot be trusted.
If i see a pattern of numerous rally days where the indexes tack on gains but the 'under the surface' action looks poor or find it difficult to play, then i become very cautious. Remember, during a healthy advance, opportunities are plentiful and easy to spot!
Also, always try and keep track of what trader sentiment is like on twitter, stocktwits, CNBC, etc etc. Try and be a contrarian. 'Listen' and 'watch' other traders and the sentiment that comes along with it. A depressed or fearful "tone of voice" from many traders tells me that a bottom is very near. The stock market is pretty much exploiting investor sentiment.
“Be Fearful When Others Are Greedy and Greedy When Others Are Fearful” - Warren Buffett
Another note i want to add is it's always to pay attention and how "EASY" is it to make money in a market?? Are most traders you are watching making lots of 'easy' money?? Remember, when most traders make a killing betting on one direction, the party might be over on that particular direction. The market loves to fool most of the people most of the time! Sucks everyone in one direction, gets everyone 'comfortable' doing a particular thing and then pulls the rug from underneath everyone right when everything started to seem 'easy'.
The market will almost always reward the 'HARDEST' trade: Before you start to analyze a stock or a market : Ask yourself first and foremost:
What is the hardest trade to make RIGHT NOW?? What trade would make most other traders most nervous?? Would buying this dip here make other traders most anxious?? Would shorting this huge gap up make other traders most nervous??