You are hooked up perfectly. The flicker is just the clock pulse (SCK) going through D13 which is connected to the "L" LED.
The hangup is the Atmega328 will not identify itself with a chip ID and the fuse settings. The sketch usually works perfectly with all manner of Arduino chips. We should test it in the Arduino IDE to be sure.
Open the Arduino IDE and select the Arduino as ISP in the Examples sketches folder. Select the appropriate board and serial for the "programmer" Uno and upload to the Arduino. When done, click Tools -> Programmer and Arduino as ISP then click Tools -> Burn Bootloader.