I have just gone through this with my swap. Gauge pegged past max. I swapped a 89 drivetrain into a 87 Truck. 89 has a three prong oil switch in normal place. I used the 87 wiring harness and it has a two prong plug that would not fit the three prong switch and then an extra wire for the afore mentioned lower sending unit above the oil filter. I did not have a sending unit but did have a plug. The first thing I did was ground out the extra wire I had and sure enough it dropped the oil gauge to Zero. So I simply bought a new, standard oil sending unit and plumbed it where the original 89 motor had a plug. Now gauge works fine.
I think that if you have a gauge that is pegged high, you have an open circuit and should try grounding the sending unit wire and see if the gauge falls to zero. If on the other hand you have a zero reading, then maybe the sending unit is bad or grounding out internally. Then again, it could be wiring or gauge itself, but checking the simple worked out for me.