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Wow! Hard to believe that muck in the cylinders.
Recommend you a) remove the manifold and make sure the inlet/outlet passages are clear, b) remove the cover plate over the tappets and check out that area, and c) remove the large pipe plug under the carb and stick one of those smartphone camera probes into the oil pan. Use the probe directly and also with the 45 deg mirror. See what you see.
I caution you to go easy on the gear teeth in the flywheel. I'd hate to break a tooth and have to replace the ring gear. Much easier to replace a bent flywheel stud.
Doubt if it's the aluminum piston that's corroded. More likely the piston rings are stuck to the cylinder wall. Pistons #1 and #4 are at TDC, so any rotation of the crank is trying to pull them down. While holding some torque on the crankshaft, I'd encourage those pistons to move down by tapping on them. Take a short piece of 2x4 and relieve the center so you're hitting the edge of the piston (don't want to collapse the crown) and give #1 and #4 some 'encouragement to move'.
On the plus side, the small flywheel motion that you're seeing now indicates to me that your bearings are in good condition. Your rings are stuck. The motion you're seeing is due to clearance between the rings and the piston, and clearances at the bearing at both ends of the piston rods.
I think you have a good engine. Worst case I can see is that you take the engine home, remove the oil pan and crankshaft, then drive the pistons out.
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