This is the second time in a few weeks that this has happened. Woke up this morning and noticed the pool water level went down at least 1 inch overnight. This was significant since the water level was already very low, at the minimum level for the skimmer to properly function. I also have a bottom drain in the deep end and had the pump running overnight, 1/2 skimmer and 1/2 bottom drain.
Went over to the pump/filter and notice a slow trickle of water coming out of the backwash/waste hose (blue hose in picture). Turned the pump off and spun the filter valve around to re-seat it in the "filter" position. Turned the pump on and water going even more quickly into the backwash hose! Turned off again, re-seated the valve handle on "filter" again, turned back on. Now no water is coming out of the backwash/waste hose and all is OK. Filling pool with water from garden hose right now to get level back up to normal.
Here is a pick of the setup. Do you think it is a bad valve on top of the filter?

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Went over to the pump/filter and notice a slow trickle of water coming out of the backwash/waste hose (blue hose in picture). Turned the pump off and spun the filter valve around to re-seat it in the "filter" position. Turned the pump on and water going even more quickly into the backwash hose! Turned off again, re-seated the valve handle on "filter" again, turned back on. Now no water is coming out of the backwash/waste hose and all is OK. Filling pool with water from garden hose right now to get level back up to normal.
Here is a pick of the setup. Do you think it is a bad valve on top of the filter?

Uploaded with ImageShack.us