It doesn't mean the web shield isn't working, just that it isn't scanning your browser downloads.
Do you use any other application that uses a proxy, e.g. ad blocker or web accelerator, etc. ?
Does your ISP insist you use a proxy ?
As they are the only reasons I can think of that would mean the web shield has no content to scan. I don't know if you have made any other tweaks to avast, etc. (based on your question as to what should your avast proxy settings be) ?
If you have no other proxy settings (as in my questions) that you would have to co-ordinate with the web shield proxy, then it could be a painful exercise in trying to pin down what it might be. It may be quickest to do a clean reinstall of avast, thereby setting everything back to its defaults.
Download the latest version of avast
http://www.avast.com/eng/download-avast-home.html and save it to your HDD, somewhere you can find it again. Use that when you reinstall.
Download the avast! Uninstall Utility,
find it here and save it to your HDD.
1. Now uninstall (using add remove programs, if you can't do that start from the next step), reboot.
2. run the avast! Uninstall Utility, reboot.
If step 1 failed it may be necessary to run this from safe mode, once complete reboot into normal mode.
3. install the latest version, reboot.