On my 97, the 4x4 lights would only flash after the truck went over 35 mph for a bit. If I kept it below 35, the front would stay engaged, with no flashing lights. I don't know if the 96 is the same.
When my rear sensor failed it was clean, with no visible damage. Also, I didn't find out it was my rear sensor until I replaced my front sensor, and that didn't fix the problem. If replacing the rear sensor hadn't solved my problem, my next step would have been checking the switch.
The dealer was going to be my last resort, for fear of getting the seemingly standard answer "replace the transfer case for $2000".
At any rate, I assume you disconnected the battery for a bit after the sensor swap. I've read on this board that that is required to reset the system. Be happy you have a 2-wheel switch option, my 97 doesn't, so I had to disconnect the shift motor connector underneath just make the truck drivable.