As fietsbob said the way to adjust is to loosen the top nut enough so you can turn adjustable cup with the knurled ring. To tighten, one would normally engage this adjustable cup with a wrench so it can be held in place and tighten the top nut against the bottom nut. However in this case, the toothed spacer above the adjustable cup has a tab that slips into the groove in the steerer and stops it from turning. Supposedly all you need to do is loosen the top nut, tighten the adjustable cup against the bearings. When the adjustable cup it properly tightened (this will require some trail and error) slide the toothed spacer into place over the adjustable cup, so the upper and lower teeth mesh, and tighten the top nut; because the top spacer will not turn, there is no need to secure the adjustable cup. Unfortunately this type of headset has a design flaw, as the tap on the top washer is subjected to a lot of torque, and it was not unusual for the tap to brake off inside, locking the headset together and severely damaging the steerer threads. This got to be such a problem that some mechanics used channel locks on the knurled ring to properly torque the top nut. You can probably get away with greasing the top spacer, but you should inspect the top spacer to be sure the tab has not been damaged.