In addition to dreams and dreams within dreams, Craven further has the "reality" of the characters blend into their screen characters. At one point, Langenkamp is not only playing "herself" but also, with self-awareness, forced play Nancy, her character in the first film when she realizes that she is no longer speaking to John Saxon, but to her on-screen father. At a couple of points, Craven shows parts of the screenplay of the scene we have just seen. Craven also plays with Freddy Krueger's celebrity status, creating the word "Freddie-isms" in his commentary. We see Freddie Krueger fans dressed in striped sweaters and fedoras at a talk show, a Warhol style series of Freddie Krueger portraits at the New Line office, and actor Robert Englund doing a parody of himself as Freddy Krueger. At several points in the film, clips from the first Nightmare on Elm Street appear featuring Heather Langenkamp.

Based on what I've read about him, I suspect Wes Craven is a lot smarter than his movies. I suspect New Nightmare didn't fare as well at the box office as the other Nightmare sequels because it was in part an examination of itself and the genre of horror movies. Less deliberately funny, Craven also created tension by contrasting reel horror with real horror, with shots from a real Los Angeles area earthquake. While not a project that Craven originated, the Scream series indicated that audiences were ready to get in on the joke of a self-referential horror movie, as long as it remained a joke for both the film makers and the audience. In some ways this was a twist on the film that established Craven's reputation, the sometimes too realistic Last House on the Left. On that film, the ads admonished the audience to tell themselves, "It's only a movie".