The Black Cats went down to a 2-1 defeat with Craig Gardner's penalty sandwiched by two efforts from Jimmy Kebe.
O'Neill told Sky Sports: "I felt we are in reasonable form, so we have come in with a bit of confidence.
"But that said they started better in the match and eventually - although they scored early - when we have got back in the game we looked reasonably strong and I thought we had enough chances in the game, before they scored, to change the outcome.
"They kept putting the ball in behind us, which is their prerogative and they caused us a few problems and we got back in the game. We weren't just back in it but I thought we had a foothold."
O'Neill was not particularly happy with the second goal which Kebe scored with just minutes left as he headed home from close range.
"There is always the possibility of conceding, even the teams with the best records but at any moment of the game. We conceded a rather sloppy free-kick but for their player to head home from almost under the bar is particularly disappointing," he admitted.
New recruit Alfred N'Diaye blazed wide from inside the box after being sent clear by Adam Johnson with the game at 1-1 and O'Neill admitted that was a big moment, coming not long before Reading's winner.
"I thought that was the one, great link-up play with Adam Johnson but he must strike it on target and the miss has given Reading renewed hope at that stage of winning the game," he said.
"But that said Alfred has only just started and he will learn and has done very well and there are some aspects of his game we all think we could improve on, and although disappointed at that [chance] I thought he did okay."
One plus point for O'Neill was the late debut he handed to Danny Graham and he almost scored.
"I was delighted with him and delighted for him," said the Sunderland boss.
"He got an excellent reception from the away fans and made his mark on the game and got very close to what might have been the winning goal and I was delighted with him."


























