After leaving Wendell's Nightmare, another talk sequence happens, after that, Alundra will automatically leave Meade's house. Alundra will be asked by Giles to go to the Sanctuary, Alundra automatically follows Giles there. After a brief talk with Ronan, Alundra is 'asked' to pray to the gods, it is impossible to progress without saying Yes, so do so.
After praying, Alundra is free to leave, at this point, head back to Septimus' house. Septimus talks about some of the villagers and their cursed dreams, as well as his attempts to solve them. Attempt to leave Septimus' house and the screen begins to shake due to the Northern Coal Mine collapsing. Leave Septimus' house and head North out of the village, stick to the left of the screen and walk up past the lake and enter Olen's house. Open the chest inside which contain a Gilded Falcon, head back to the village and enter Beaumont's House.
Once inside, talk to everyone then try to leave, Septimus will enter and another talking sequence will occur, ending with Alundra entering Olen's Nightmare. Talk to everyone in the first room to discover exactly what is happening, at this point, enter the top right door and talk to the person there. Zane mentions that the levers have to be thrown in the order left, left, right and left, keep this in mind. Head back to the previous room and talk to Olen. Another sequence will play, with the wall at the back being blown up, and four Murgg entering. Kill them quickly and open the chest that drops, which contains a Gilded Falcon. After a set time, Alundra is forced to leave the nightmare.
There is another sequence in which the characters talk about the results of the nightmare, ending with Olen's death. After that, enter Jess' house, Jess shows Alundra the mining bomb, before leaving. Take the mining bomb, which allows Alundra to blow up cracked walls. Exit the village from the Northwest, taking the Western exit at the next screen. Head to the North, either jumping up the cliffs or go up the steps. Feel free to talk to the three villagers there, before using the bomb to blow up the grey, cracked rocks and enter the Coal Mine.