Okay so, I'm not aware of any universal rules of writing, nor am I a scholar of literature, so every time I give feedback it feels more like I'm telling the person to write more like how I would like to write/read. So feel free to take my advice with a grain of salt. With that said:
First thing I noticed was a couple of grammar/proofreading errors. They were all minor, but it kind of breaks the immersion when I have to stop and reread a sentence. Stuff like he could heard the developing laughter and Surely their must be something out there
And I felt your language could be improved a bit. Not that your writing lacks vocabulary, but that I felt it was a bit too verbose and clunky at parts. Don't be afraid to use a simpler word if it will fit better.
About your story telling, the story was actually really interesting, and I felt like I would want to read more. I have a couple of suggestions though.
I feel like you're throwing too much unexplained mysteries at the reader. I can see that you're trying to make the reader interested by posing these questions, but without at least giving some hints, it's more frustrating really. I remember reading this article that criticized the introduction of Skyrim, because it was like a 5 minute cutscene where some characters are talking about things you don't know, cities and people you haven't heard of, and it's not a good intro because all it does is confuse the player with jargon and doesn't really hook him to the story.
What I think you can do is, instead of saying "Catherine had an accident, long ago.." and then leaving it at that, give out hints throughout. The reader will feel engaged if he can try and guess or predict what the mystery is from the clues you give him.
Same thing perhaps with the nightmare that is going to plague the village. What is it? Why? How? I know you'd be answering these later in the story, but my personal opinion is leaving it too vague like that at the beginning isn't too good.
I think with that you can much easily hook the reader. I also felt the story needed a bit more of a setting. Perhaps talk a bit more about the village? About what other people do in their daily lives, more vivid descriptions.
Also, I felt the discussion between the characters might have been better as an actual conversation. It lets you show off how the characters speak and act. Speaking of characters, I think you could try making your characters a bit more likable, relate-able. Maybe give them little character quirks, or show their personality more through the way they talk and act. A really good way to do this is to model characters after people you know in real life. Think about how this person may think, act and talk.
I think this is all the feedback I have. The best way to get better is really to keep writing, as well as reading. Are there any authors you're a fan of? I've personally been reading a lot of Stephan King, and some of his longer pieces are really drawn out, but it works because he hooks you into the plot, makes you wonder and keep guessing before he goes into the details.
I would love to read more if you ever write another chapter or enter the contests we have on Newgrounds!