I believe it uses a sensor at the crankshaft to measure engine position, relative to the IP/RIV position. No timing light.

I agree. It must use the TDC sensor as a reference/ time base to measure the IP/RIV lug angle position. That's why there's such a tedious procedure in section 03-345 of the W123 FSM - Checking and correcting adjustment of TDC transmitter. A similar procedure for the W124 probably exists.

http://mercedes.thatchermathias.com/w123CD2/Program/Engine/617/03-345.pdf

The timing light I am working on can trigger off the TDC transmitter or the RIV port lug. On my 85 300D, when the timing light was triggering on the TDC transmitter, the harmonic balancer marks was spot on at 20 degree after TDC (per FSM spec). That indicated the TDC transmitter was correctly adjusted. Does that also indicate there is no chain stretch?

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85 300D turbo pristine w 157k when purchased 167,870 July 2025
83 300 D turbo 297K runs great. SOLD!
83 240D 4 spd manual- parted out then junked