Sounds like your torque converter or clutches are gone. Same thing happens to me occasionally (more and more often now, I'm replacing the transmission sometime this week assuming I find time, limping it to work till then) - the oil coming out of the bell housing is transmission fluid, just really dirty burnt transmission fluid. You probably have a blown front pump seal, it's the seal that seats around the neck of the torque converter. I have one sitting on my desk here waiting to go in - NAPA part number 1-5235, it costs less than ten dollars. If you want to rebuild the transmission (replace clutches etc) you can probably get the kit on ebay for $155 or so still, I saw a Pirate thread on doing this recently.
http://cgi.ebay.com/ebaymotors/AW4-...r_Truck_Parts_Accessories?hash=item4a8e93a700 is the rebuild kit the guy used to rebuild his clutches (just looked through my browsing history)
You probably also want to install a new pan gasket and filter while you are working on it, beware that the NAPA computer system currently thinks all XJs have the 3sp Chrysler transmission used with the I4/V6 till the early 80s and 3sp auto I4s afterwards, ask for an ATP B112 kit (or buy it on RockAuto, cheaper that way) and you will be set to go.
Or buy a whole new AW4 from a low mileage/working junker, what year is yours? You probably won't spend more than a few hundred bucks on it if you don't mind dropping and replacing it yourself.