Usually the pulley can't move up and down on the shaft. There is no key holding it so it would slip in agitate mode. As to the Mode Shifter there is plenty of info about it in these forums. A good thread about them is this one: http://appliancejunk.com/forums/index.php?topic=11579.0
especially the memo I posted in the last post. Also, you should always post a model number and usually a serial number too. The S/N helps identify the age of the machine.
PS: Down there \|/ you'll see links to other threads re Hydro Wave and Mode Shifter.