It's an electric solenoid that when engaged, only allows the internal shift mechanism to travel from 1 to 4. When I had my T56 apart, I removed the 1-4 mechanical shift guide, and from looking at it, see that when the yellow arrow illuminates, you cannot go from 1 to any other gear, even 3 or 5 or 6, since you are locked into that 1-4 guide.
Before I got the "plug" to fool the system in my '94, I looked at the wiring diagram and think it's a ground-to-engergize solenoid. The wire goes under the dash, over to passenger side, under the removeable floor at the passenger feet, then up into the dash again. Maybe your solenoid is shorting to ground and stuck "on?"
For now, unplug the wire from the side of the transmission. If the trouble code bothers you, ~$30 at SummitRacing.com for the plug.