You have a light on your sensor which which should come on when it just sees the tab, and it should just stay on until you just get past the tab and then it should go off. In diagnostics and if the signal is sensed by Mach via the input, then you will see the same kind of thing, namely the index led will will turn on and then as you rotate the spindle it will turn off until the tab is seen again.
If you measure the voltage out of the sensor conn pin 2 or 4 ( which ever one your are using ) to ground , you will see the voltage change from a low value to a high value. The low may be .8 volts and the high may be 4.9 volts, but there is a difference between the low and the high. That difference, in order to change the state at the PP from low to high, needs to be around 3 volts. If that is not the case then you may not be able to change the the state of the signal from a high to a low. It's just a square wave _----_----_ on so long and off so long at a low and high voltage. So lets make sure that is correct first. Since you are using 5 volts there may be enough of a voltge drop across the internal circuitry of the sensor such that you are only getting 3 volts out say and which may be insufficient to change the pp state from low to high. If thats the case try adjusting your feed voltage to say 10 volts and see how it goes as 10 volts may be the min voltage required for that sensor.
Attach your xml file you are using and we will have a look at your settings.
RICH