Those two holes should NOT be lining up. You want the holes to be in line with the barrel and vent to the piston, not to the air as your pin is showing. Therefore the number should be FLAT and facing UP. The hole in the top is not for indexing, but rather to facilitate cleaning the passage to the barrel. Fits a pipe cleaner great!
See the pic in the first page that another member has posted. Set the gas to 1.7.
Also what is on the headstamp on the ammo you are using? I was using a particular factory of chinese stuff and it had the same issues with any gas setting on both my SVT rifles. Same symptoms as you have described. After switching to any other ammo, they were working great (privi, wolf, S+B, LVE, Russian surplus). If you have the same factory ammunition as I do it can be a potential culprit.