if the position of your stem in the pic is where you want to run it , then its wrong, you will cause the stem bolts to compress the clamp slot on the stem at the back, this will either damage the stem or cause it to work loose, the fork steerer tube should only be about a mill below the stem top , or sticking out past the top of stem (ideal position) , as Gary said use spacers below or above to set the hieight of the stem and space out the compression cap, its meant to compress the bearings enough to seat them ,not hold the stem on, all the holding it all in place is done by the stem , with the top cap set tight enough to seat the bearings and the stem bolts tightened well you should never get any play front end at all
run my stem low down as i have big bars , the spacers take up the gap above, the top one sits about 1 mm above the top of the steerer tube ,( 1mm stainless spacer below the stem makes this height), the stem actually distorts the tube enough ( probs a few thou') to actually lock the top cap in the threads, i do tend to over tighten stuff though,
having said that i never have to adjust it once set which is what you want no wobbly bits
