Advanced Tape Reading Technique for Stock Trading

Advanced Tape Reading Technique for Stock Trading

Tape reading is a legendary term for stock traders. Today we review an advanced lesson in analyzing price action in the stock market.

Definitely a blog post to print out. It took me a few years to fully understand this strategy.

Not an easy one but it's the most complete structure I have ever seen for reading the tape over a 2-5 day window. 

Give yourself some time to study it. It's worth the effort.


SPY ETF Chart 9-25-19

SPY ETF Chart 9-25-19

Short Sale Day

  • Let us assume the close on a Selling Day was strong, which in turn would indicate an up opening
  • the stock opens up and penetrates the short sale objective – the selling day high
  • after the penetration we watch for a slowing down of the move
  • when it is clear there is no further Buying Power, the reaction starts.
  • We make our Short Sale – at through and above the high of Selling Day

*We try to make all short sales on the high made 1st on penetrations of Selling Day Highs

  • this is the most favorable action for your play
  • we would not put out a short sale where the stock opened down and declined further without a rally ( this action is not as favorable as the high made first)
  • When a reaction takes place after a penetration of the selling Day High we stay short anticipating our covering point next day on the Buying Day.
  • Should the selloff be severe and with activity during the short sale day session we cover the same day.
  • A trader begins to anticipate a short sale after the close of a selling day session
  • First note the closing price and its relation to the high and low of the day.
  • When a stock opens down on a Short Sale Day let it alone, it does not favor your play.
  • In putting out a short sale on a penetration made first it will generally be after a rally of two or three days.


Buying Day 

  • We buy a stock when we think it is on a bottom dead center and the trend is just about to turn up.
  • on a buying day when the stock rallies from the low and the gain in points is sufficiently large, we sell out on the same day.
  • On a Buying Day we buy at, a little above or below the low of the previous day – this would be low reached on the short sale day.
  • Provided the decline ends at or near the low we can with reasonable certainly figure whether this low will be our Buying Spot
  • we get this indication from the way the stock closes on the sell short Day
  • we get this indication by watching the close and whether prices are up or down from the high of the day – or up from the low of the day – weak or strong.
  • When the close is strong on a Short Sale Day – that is the closing price is up from the low and nearer the high for the day, we expect a higher open on a buying day.

Buy Day

  • When this happens, we wait for the price declines from a high made first on a Buying Day
  • the short sale day low is our point to watch for it to be reached or for the price to sell under this point since this is where we buy our long stock.
  • in a strong uptrend the decline may “fall short” of reaching this low and the rally on a buying day may start a little above this low.
  • Go back to the close of the Short Sale Day and we find that it was a “flat” close then from this we expect a lower opening on the Buying Day
  • and so far this would cause the low to be made 1st and is a stronger indication when made early in the session that a rally would start from this low, and hold the gains for a strong close
  • When a high is made first on a Buying Day this causes the low our Buying point to be made last and carries the possibility that the stock may trade down and close near the low.
  • A weak close on a Buying Day shows that the short interest (inside or professional) is in no hurry to cover
  • An indication of a buying Day low violation.
  • A trader takes losses when they are small
  • Buying low points made first on a Buying Day are for the most part profitable

Sell Day

  • When the low is made 1st on a Buying Day and the closing price is up from the low and nearer the high of the day – we look for an expected up opening.
  • and a penetration of the buying day high to sell on (Selling Day)
  • these penetrations occur more often in an uptrend
  • in an uptrend expect a deeper penetration of the Buying Day High
  • From a strong close on a Buying day when the opening of the Selling Day is up & wide– sell your long from the Buy Day
  • do not care of it goes further
  • Should a Buying Day Profit be partly lost on the selling day open “Sell out the long” without hesitation
  • Should the opening on a Selling Day be down and decline further sell out on any rally.
  • Should the open be below the low of the Buying Day low, the rally to this objective point up is where to sell, (not holding out for the Buying Day High.)
  • On a stalled opening or when the opening and the previous close are the same, sell immediately upon seeing this price.
  • A Buying Day Purchase must show a profit, what is, the spread from the low to the closing price and not lose it on the opening of the Selling Day.

Buying on a Buying Day low Violation

*The Buying Day Low Violation must be made First and this would be the result of the Buying Day Low made Last

  • The action of the close favors the probabilities that the opening prices will be down and the opening is in itself often the start of the violation and that the decline will continue until it meets support
  • * the decline can stop anywhere under the Buying Day low but from our “column” we know the range of declines of past violations and we know that they stop within the fractional limits
  • We watch the market very closely for support Buying and for the decline to slow down and stop for we wait to buy at this point.
  • You will notice a considerable amount of trading at this point, then the activity slows down and becomes quiet.
  • the quiet market may penetrate the Buy Day low fractionally and begin to rally
  • we buy at this objective and expect the rally to start from this point
  • However – a support point here may only be temporary and another small decline may take place that would establish a new low.
  • Chances are the rally would start from either of these low points after all this probably would be the third session of a decline and “remember” we are not Buying on top of a three day rise as many traders do.
  • in the case where these two lows are made and had we bought at or near the 1st low another small decline should not upset us.
  • After the rally starts it will generally make up all the violation decline bringing the price up to the Buying Day Low Point
  • at or through this point is our sure profit selling objective
  • from this buy day low the decline may start again
  • The rally from a Buying Day low violation made First is caused by short covering and the start of the move is generally engineered by insiders.
  • Most of the violations are found in downtrends and is usually a session or two longer.
  • *we watch the spread from the Buying Day low to the low of the violation and note if this spread is wide enough to make profit.

Buying Day Example

  • At the opening of the market, notice whether the price was up and continued higher making the high First or
  • whether it opened down and is declining further, making the low First
  • Making the high first expect selling from this point and a reaction to follow on an up opening, wait
  • do not buy – tape readers do not buy on Bulges.
  • On a down opening observe the spread from high of the previous day, to the low of the present decline.
  • the normal trading decline will generally stop a little above or below the low of the previous day, the low of the 2nd selling day
  • the “Buying Point” is around this low point which the activity quiets down.

*** Strategic insights and sleepless nights courtesy of George Douglas Taylor


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