W126 auto trans...slips out of gear on upshift
 

1984 500SEL (euro model)...On normal accelleration, car shifts up through gears, but between 2 and 3 (possible 3 and 4 also) it slips out of gear momentarily. If I keep pedal down, it slips back into gear with a noticable clunk. This doesn't seem to happen if I drive around in "3" instead of "D". In general, the kickdown from 4th into lower gears (under 1/2 to full accelleration) has a delay, then a good hard clunk. I am going to check vacuum and bowden cable for the hard downshifting, but the false neutral thing scares me a bit.

Sounds like your modulator valve is either bad or not getting vacuum.

And I am sure that you are keeping the fluid at the right level. If it gets to low it will do that.

First you should adjust the link at the back of the motor to the control pressure cable. Mark what you have and lengthen it an 1/8 inch. Try this for a few days. If it isn't enough try turning the modulator adjustment a turn clockwise. Maybe both maybe more one than another, but do the cable first maybe twice.