Since "A picture is worth a thousand words" I thought that I would share a few pictures. Those of you new to smocking construction will find this a little scary, but let me assure you that it works every time!
Following #138 pattern instructions, complete the smocking and stitch the piping in place. Next, matching the center of the insert to the center of the front yoke, trace the armhole curve with a wash-away marker.
Using a short straight stitch, stitch right on top of the marked line. Using a short and narrow zigzag stitch, zigzag on top of the straight stitching.
Cut out the armhole just above the stitching. The stitching will hold the pleats in place during construction.
This is also the same technique used for smocking at the neck edge and a full smocked bodice.