Part of this issue is a quirk of the earlier WBX wiring (mine is a '83.5 and
did the same thing): when the "empty" sensor in the top of the expansion
tank (the one in the rear left of the engine room) is out of contact with
coolant it not only makes the light flash (and it should falsh when the key
is first turned, its the test circuit), it also pegs the temperature needle,
no matter what the temperature actually is.
From what you describe, I would bet the cap is bad, and as the engine heats
you are loosing coolant somewhere other than the fill  tank, but when it
wants to draw coolant out of the fill tank it cannot, and sucks air from
somewhere else.