I have a 2.0L with carbs, web cam, and petronix. I need to reset the distributor, as the nut worked itself loose at a track day, and the timing is off. I have never timed an engine before. I have a timing light, adjustable. Is the procedure as follows?
1. put light a 7 degrees, at idle, white mark should be in timing notch. move distributor to adjust
2. Rev engine to 3500 RPM, put light at 34 degrees, white mark should again be in timing notch, again, move distributor to adjust.
3. Back light down to 7 degrees, at 3500 rpm, and the red mark should line up in the timing notch?

Also, at 3500 RPM, the timing mark is not steady, it jumps around, i am assuming that is do to the increased play in the drive gear at speed.

The jumping around of the timing light is the slop in the dizzy or torsional twist in the dizzy drive, etc. Crankfire ignitions generally solve this problem.

As far as your timing - If you set 34 degrees at 3500 RPM, it's not going to make a shits worth of difference what it is at idle, that is built into the dizzy as advance. At 3500 RPM, all of the centrifugal advance (built into dizzy) is in. At a lower RPM, the springs pull the weights back and retard the timing. If you know how much advance is built into the dizzy, you'll know what the timing would be at idle.

If you have a timing light that has the degree set knob on it, you would set 34 degrees on the scale, fire the engine and run it to 3500 RPM and the white TDC mark should be in the timing "window" on the engine.

The only time you would see the red mark you say you have would be if you set the timing light at 0 degrees and let the engine idle. This would be the static advance.

I thought I should add that the marks can be any color. I mark TDC white and anything else red or some other color - your results may vary.