what did charlie realize from his nightmare about the bloody knife and the free association he did after the dream?

Charlie isn't completely aware of what exactly his dream means but he thinks it has something to do with the attraction he feels towards Alice and his twisted and limited understanding of sexuality. Charlie's complex emotions around sexuality have to do with losing his masculinity or somehow losing control in order to satisfy his sexual urges. Charlie's mother has ingrained the dire consequences of sex into Charlie from a young age. All of this manifests in Charlie's nightmare.