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You are right when you interpret the arrow light indicating "downshift" or direct drive (3rd gear) operation. The OD relay must be "off" due to the blown fuse. In that state, it grounds the light to turn it on. (the bulb has a constant +12V applied to its other side.)
Jorell's suggestion of a ground short in the solenoid wire is very likely. It would immediatly blow fuse 11 when the OD relay is powered ON at start-up.
Here is a brief outline of the control circuit...
OD operation involves 5 components and the wiring that connects them.
1) Fuse 11 (200) or 12 (700/900) supplies voltage to items #2, #3, #4, and #5
2) The Shifter button/switch (turns OD relay off and on)
3) The OD relay (controls Upshift Arrow light and Solenoid - separate wires)
4) The Upshift Arrow light (ON means relay and OD are OFF)
5) The OD solenoid (Allows OD engagement when ON, the "default" Relay state at Key On)
If the Shifter switch makes the Arrow light (#4) go on and off, then items 1, 2, and 3 are OK, and the problem is most likely the undercar wire to the Solenoid (#5) or the wire connector terminal.
Less likely would be be Solenoid itself.
Also possible (but unlikely) would be the relay controlling the Arrow light (#4) correctly, but failing to activate the Solenoid.
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Bruce Young '93 940-NA (current) — 240s (one V8) — 140s — 122s — since '63.
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