I think you got the wrong one wire sensor. Regular pusing 12v is the dash gauge wire. There are three. There is one with two wires, connector in a tee shape. That's the one for the carb ecu water temp signal. There is one fatter single wire for the dash gauge. If you ground that one, the gauge goes to max. If you meter the gague wire at the sensor, you see the gauge bimetal make/break the circuit. I think those two are close together. There should be one more smallest single wire sensor for the o/d. In the 87, this switch kills overdrive if the truck water gets too hot, so when cold, the sensor should be grounded. Go from battery + to sensor and test light should glow. If that sensor's wire is grounded, o/d should work even if sensor is bad. I've been calling it a sensor, but it's really a normally closed temperture limit switch.

If o/d does not work with working sensor/switch or with wire grounded, either the o/d solenoid valve on the top of the tranny is bad, or the wiring to it is bad.

Unplug and replug all the harness connectors. I think that's where the trouble is, or in the valve itself.