I am more than willing to do the 2mm method, but would it really make such a different as going from 10-12 degrees advanced to being 0-5 degrees stretched? I did rotate engine properly (clockwise when standing at the front and facing the engine). I rotated the engine again being ever so careful to align marks and I get the same result.

My suspicion is that the timing pointer may be misaligned or bent (I am using the pointer, not the hole. Although the hole would indicate 20 degrees late, which would almost make more sense.) What would help to clear this up is to get a picture of the timing pointer from someone else's 240D of similar vintage (mine is 1981). I am hoping someone on the forum might be able to provide that.