This is really a good site, but make sure that the text (and figures) are for -500 and -400. 737-200 packs doesn't have the AUTO position (only ON or OFF). Since I've never flown any 737 model but the -200, I don't know if the systems operate at the same manner.
Isolation valve permits, in certain conditions, that one bleed source feeds the opposite side - must be for eng start, operate a pack or give wing anti-ice.
CLOSE and OPEN positions are very easy to understand, don't you think?
About AUTO, to remember how will the valve stay, take its name : ISOLATION. So, this means that, in normal conditions, AUTO position will maintain ISOLATION isolating both sides (closed). The ISOLATION VALVE will open if any pack or any eng bleed switch is positioned to OFF.
One good thing to remember is which switches of this panel are AC operated. Note that we have six switches (this order, from left to right, up to down): RH PACK, ISOLATION, LH PACK, LH ENG BLEED, APU BLEED and RH ENG BLEED. Now, imagine an "A" made in the panel: we will have LH ENG BLEED, ISOLATION and RH ENG BLEED, don't we? The "A" will show you the AC operated switches (the other ones, which make a "V", are DC operated).
Now you my ask why is important for you to remember it. It's because you must never forget to check "bleeds on" before shutting down the engines: in the event you lose APU and don't have 115VAC ground cart, you won't be able to start your engine ("battery start"), because you cannot open the engine bleeds.
I hope this helps you o understand a little bit more of the system.
Good flights!
PP