OK. So the plate is presumably isolated and grounded via the tool or whatever in the spindle, right? That's normal practice.
But your diagram shows the clip on the touch plate so it is permanently grounded! The touch plate should be connected via the pullup to +5V. If you need an alligator clip to do that then fine. Normally you could rely on the spindle being grounded anyway but you might need another clip and ground wire to make sure. I've not found it necessary but it depends on the machine. Commonly the "probe" is a precisely dimensioned thing that's held in the spindle when the machine is being referenced.
Given some reinterpretation your wiring is OK, though I think 120R pullup is a bit low, you will be sinking 40mA odd. 1K would probably do the job.