This info is for everyone who's having trouble:
First of all you must match the Nightmare that the campfire is producing to the Nightmare needed by the Campfire upgrade. Look at the left end of the progress bar for the upgrade and you'll see what Nightmare you need. If you're at level 4 now you need Skeletons.
Nightmare needs go in rotation:
Zombies
Snakes
Bunnies
Skeletons
Second point - Your town can only hold 60 Nightmares. 20 visible and 40 hidden. As you tap out the visible ones the hidden ones will appear at random points in your town.
If you sit on one spot over a street your Nightmares will gather there.
Each kid shows how many Nightmares they will pay out in the pop up menu for the Campfire. If you count them up and the total is more than 60 you'll lose any beyond 60 when they pay out if they come out all at once. You can adjust for this by sending a few kids to the campfire, waiting long enough to tap out the Nightmares that appear, then sending more.
My strategy: I have removed all Streets (that's the pavement with sidewalks) from my town except for a loop around my Campfire with a tail leading to the Boardwalk. Everywhere else in town I use Concrete path instead of Streets.
I send the story teller to the campfire, then wait 30 seconds (or so - I just count to 30). Then I send 4 kids to the Campfire and wait 30 seconds. Repeat until all kids are sent. I have 19 kids so it takes a few minutes.
When the timer goes off for the story teller I tap the handshake, let the Campfire whoosh and spit out Nightmares, then I tap them as fast as I can, which is not too hard since they appear on the street right around my Campfire. As each set of kids comes out I tap the handshakes and tap the Nightmares.
Now, all that being said... I still don't get credit for all the Nightmares I tap each round. I'm playing 2 nearly identical games and keep my totals equal (or know the difference) and I've been up to 50 Nightmares short on one game or the other several times. Ttoday I was off by 12 which was doubly irritating since that's exactly the number I needed to hit the upgrade mark.
Here's a tip though: If you're just a few Nightmares short of upgrading go ahead and start the next Nightmare in the rotation, then go visit your neighbors, skipping any town that doesn't match the Nightmare you need for the upgrade. Once you've upgraded the campfire enough you'll be spawning Nightmares faster than you can hunt them down in Neighbor's towns.