First, before we go any further, we're going to run through decrease methods and some definitions.
You'll need to use matched decreases for this, one leaning right and one leaning left. I suggest using 'knit two together' for the right leaning, and 'slip slip knit' for the left leaning. If you don't know those, or want to review, there are fine directions with streaming video, here. If you have trouble remembering what leans where, think like this: "knit two togetheR leans R", and "sLip sLip knit leans L".
When I am saying which decrease to use, I will tell you to lean them TOWARD or AWAY FROM the center line of the jacket. The center line is the steek, in the front (the center of the front), and in the back is obviously the center column of stitches that would run along your spine if you put it on (the center of the back).
The vertical pattern lines are just that - the vertical lines formed by the dark color in our pattern, as drawn out by the yellow lines on this photo:
The vertical pattern lines are going to work like landmarks.
There will be one stitch that will become what I'm going to call "The Decrease Column", meaning the vertical column that all the other stitches will be decreased into. (I've never heard this term before, that I know of, but it sounds good - obvious. I like obvious terminology.) To illustrate, check out the photo below:
For now, think in columns - vertical stacks of stitches - not horizontal rows. See the column of stitches along the yellow line? (Damn, that's a blurry photo... work with me here.) And see how it terminates in a single stitch on the needle up at the top? And how the other columns, marked by red lines, disappear into it? Okay. The yellow-line column is the Decrease Column. It's gonna squiggle back and forth across the shoulder in the shape of an S. All your decreases will be worked with the decrease column stitch, and one on either side of it. If you're not working a decrease column stitch when you're decreasing, something's wrong.
This is what we're gonna do:
PART ONE: (this is kind of the hardest part; if you figure this out, the rest is down hill) Part one is represented by the aqua line on the photo, and leans TOWARD the center line of the jacket.
Beginning at the steek (the start of the round), knit over to where the body and sleeve stitches meet on the needle. Knit them together, the last stitch of the jacket body and the first stitch of the sleeve. Continue on around and when you get to the last stitch of the sleeve, work a slip, slip knit, so that the last stitch of the sleeve and the first stitch of the body are joined together.
Get how that worked? Both decreases lean toward the center line of the jacket.
Work across the back, and again when you get to the last stitch of the body and the first stich of the sleeve, work a knit two together. (Leans right, toward the center line of the body.) Work the stitches of the sleeve until the last one, and work it and the first stitch of the body as a slip, slip knit. (Leans left, toward the center line of the body.) Continue across until you're back at the steek and have finished the round.
That round establishes where the decrease columns are; the stitches formed by the decreases (there are four of them) form the base of the decrease columns. We want to continue working in this method until we've decreased away the body stitches to the next vertical pattern line. The official directions go like this:
PART ONE OFFICIAL DIRECTIONS: Beginning at steek, knit to one stitch before the decrease column, knit two together. Knit to next decrease column, slip slip knit. Knit to last stitch before decrease column, knit two together. Knit to last decrease column, slip slip knit. Knit to steek. End of round.
DECREASES ARE WORKED EVERY ROUND UNLESS YOU ARE FUDGING SOMETHING. And you only fudge things once. So for part two and part three, you do decreases EVERY round, the whole way up.
FUDGE POINT: If you reach the vertical pattern line with one or two decrease columns, and not others, continue working rounds, only decreasing on the decrease columns that need to 'move' toward the vertical pattern lines, and knitting past decrease columns that are already joined up with the vertical pattern line. This is the only fudge point, so make sure that all four of your decrease columns are on vertical pattern lines before continuing to step two - fudging won't show much here because it's in the arm pit, but anywhere else it will be a zigzag that's pretty obvious.
As Elizabeth Zimmerman put it, we're nibbling up the body stitches with the decreases. Once you get to the vertical pattern line, we basically do the reverse, and nibble up the sleeve stitches. This time the decreases lean AWAY from the center line of the body.
PART TWO: shown on the photo in red, this is the bulk of the decreasing done in this step. Now that you've hopefully got the hang of it from part one, I'll just give the official directions.
PART TWO OFFICIAL DIRECTIONS: Begining at steek, knit across to the decrease column, work a slip slip knit. Knit to last stitch before decrease column, knit two together. Knit to decrease column, slip slip knit. Knit to last stitch before fourth decrease column, knit two together.
I hope you're getting the hang of this by now. See how you're nibbling up the sleeve stitches? Keep on nibbling them up, until you've got one pattern repeat left of the sleeve. The decrease columns will be the vertical pattern lines on either side of the pattern repeat; you should have nineteen sleeve stitches left, including the two decrease column stitches, on each side.
NECK DECREASING: This begins somewhere in the Part Two decreasing section. You will need to make a V-neck by decreasing about eight inches/eighteen cm of stitches. Think in terms of pattern repeats, though, not inches. For most people knitting this jacket, it means decreasing one pattern repeat on each side of the steek, much like you're doing the armhole shaping. For people knitting at a really small gauge, you'll need to decrease one and a half pattern repeats.
For depth of the V-neck, you'll have to decide yourself. For a deep one, start working the neck at the same time as Part Two of the armhole shaping, and decrease on each side of the steek, every other round, until you've decreased away the pattern repeats, then knit straight. For a more shallow V-neck, work three or four inches/four to eight centimeters plain, then begin decreasing at the steek EVERY row until the stitches are decreased away, then work straight.
Because you're decreasing next to the steek, you won't really be able to see the opening until it's cut and laid flat. But the fabric of the jacket will begin to narrow dramatically, so be ready with a shorter circular needle, if you need one.
OFFICIAL NECK DECREASING DIRECTIONS: worked at the same time as the armhole shaping.
FOR A DEEP V NECK: When you begin Part Two of the shoulder shaping, also begin the neck shaping. Using the very first vertical pattern line next to the steek as a decrease column, work a slip slip knit; work to last two stitches of the round - a pattern stitch and the vertical pattern line, and knit two together. Work this decreasing every other round until neckline width has been reached, then knit straight.
FOR A SHALLOW V NECK: Work several inches/centimeters of the Part Two shoulder shaping before beginning the neck shaping. Using the very first vertical pattern line next to the steek as a decrease column, work a slip slip knit; work to last two stitches of the round - a pattern stitch and the vertical pattern line, and knit two together. Work this decreasing EVERY round until the neckline width has been reached, then knit straight.
PART THREE: Shown in yellow on the photo, we just switch directions again, and nibble up HALF a pattern repeat of the body, decreasing away stitches until we reach the next vertical pattern line. Obviously we're going to lean the decreases TOWARD the center line of the body again, like we did for the first part.
PART THREE OFFICIAL DIRECTIONS: Beginning at steek, knit to last stitch before decrease column, knit two together. Knit to next decrease column, slip slip knit. Knit across back to the last stitch before the decrease column, knit two together. Knit to last decrease column, slip slip knit. Knit to end of round and bind off steek stitches.
Once you've gotten decreased over to the next vertical pattern line, the fun begins.
This is the next-to-last step of the knitting directions; after that it's just finishing, and you're done.
I hope to hell this all made sense. If not, e-mail me. Please.