Since you watered it down you could still have some water or moisture in the sending unit wiring. You could also have a flaky oil psi gauge but if it worked fine check under the hood. The smoking was the burning off of the water unless you are smoking blue then read the plugs they will tell you a story see attached picture.
89 2.5 TBI, 4" RC lift, 1" Booms, SYE, Adams Driveshafts front and rear, Ford 8.8 with 4:88s, BFG 33X12.50X15, and a ton of other stuff.
AF Jeep Club Tail Number 184