Hi,
Your right the trans needs ATF dexron III, get the
synthetic fluid it helps alot and keeps the trans fluid from breaking down when hot, yes it gets hot!
The clutch is probably dragging like Niles said, you need to make sure it fully dissengages or bad things happen like bending shift forks and having 2nd gear not dissengage while 3rd is trying to engage. This is the major cause of these internal shifted trans failures. Check the shift forks if they are bent, replace them.
Good Luck,
perry.
