Hi Johnny,
I'm just curious whether you've managed to solve your problem with the Jaycar kit. I faced a similar issue with mine; I haven't actually found the cause of the problem but I worked around it. See full description below.
I was setting up the kit in a VK Commodore EFI, which uses a very similar HEI distributor setup. I also went with the points/ignition module trigger version and ended up with unstable RPM readings and sparks all over the place - once I even saw the crankshaft jerk backwards before it finally stopped!
I removed the kit and went back to the standard distributor setup while I worked on some bench tests to try to get to the bottom of it. I got a second hand Hall Effect speed sensor with the intention of spinning its shaft with a drill and letting it trigger the ignition controller, however I had to modify the circuit from a 100 ohm 12V pull-up to a 1 kohm 5V pull-up to get it to work, which meant that I wasn't testing the same circuit as the one I tried to use in the car. I could not reproduce the problem with that setup.
I changed it back to the 100 ohm resistor and connected the kit to the car again, this time using a common earth point for the controller and coil driver, just in case, and still had the same problem. Went back to the drawing board and came up with the idea of using a GM 8-pin ignition module - the one used with a Delco 808 ECU in the JE Camira, N13 pulsar and some other cars. The module connects to the reluctor pickup coil, provides a reference output for the ECU and accepts a timing control input. After some hours of searching, I found some usable info about the module's interface and concluded that it should work with the Jaycar kit.
I got a module with plugs and wiring from a Pulsar at Pick-a-Part, did some bench tests with it and it seemed to work fine. I pulled out my distributor, fit the module to it, bench tested with the kit and still got good results. I disabled the dizzy's advance mechanisms, put it back in the car, tried running the engine without the Jaycar kit connected and it worked fine. I connected the kit to it, tried again and was pleased with the outcome - stable RPM reading, stable timing, all good!
It's possible that it would have worked better in the "Reluctor Trigger" version, however I didn't feel like going to all the trouble of soldering and wiring that one; also I think this setup is cleaner electrically, as the reluctor wiring is confined to the distributor area.
So, there we go, if you're still struggling with it, that's one route you could take. If you've already sorted yours out, hopefully this post can still help someone else. You can find more info on the GM ignition module at
http://www.megamanual.com/ms2/GM_7pinHEI.htm. To use it with the Jaycar kit, set up the circuit as per the "Engine Management Trigger" layout - the simplest one - and select Low Edge triggering in the Settings menu. Also, add a 5V wire and an earth wire to the kit cabling, which then connect to the ignition module along with the trigger and output wires.