The timing marks line up every engine revolution, but the engine rotates "twice" for each complete revolution of the distributor. For the distributor rotor to point toward #1 you needed to rotate the engine one more revolution.
Unless you are timing off of the wrong cylinder, the problem you describe trying to set the timing with your light suggests a spun or wrong balancer. The method you described from your manual is too crude to determine whether the balancer has slipped and that the timing marks are accurate. For this purpose, use a piston stop. See the thread:
Not 100% what's wrong here for an explanation. You should also check the amount of play in the timing chain - see,
Re: 86 C10 Loping for the procedure. Verifying the timing marks and chain play are not difficult, and both are fundamental to a properly running engine.
On the 'valve rattle,' what does the oil pressure gauge indicate and what oil are you using?
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