What does Madame Shachter's vision of a fire really represent?

It represents the evil of the Nazis and the end of hope for the Jews. 

Beginning with Moishe's account of what happened to all foreign Jews expelled from Sighet - he witnesses Jews digging a trench and then being shot and dumped into it, as well as babies being tossed into the air and shot by Nazi soldiers - many Jews refuse to believe such atrocities could possibly be.  They either hold out hope that the Germans will be defeated or they simply refuse to believe that the Germans will be so evil.

This denial is prominent early in the book.  When the Jews are forced into the ghetto, Wiesel observes, "The ghetto was ruled by neither German nor Jew, it was ruled by delusion" (12).  Later on when they are about to be deported from the ghettos, Wiesel overhears Jews talking about how it is all a ruse for others to rob them while the are sent away on vacation (21).

However, when the Jews are herded into the railroad car and sent out of Hungary, Wiesel notes, "Our eyes opened.  Too late" 23).  Soon after this epiphany, Mrs. Schachter begins having her visions.  Of course, no one wants to believe what she is seeing.  But soon enough the Jews have their eyes opened again by the pit at Auschwitz where the living and dead are being burned.

As they narrowly escape the pit, Wiesel's father asks his son, "'Do you remember Mrs. Schacter, in the train'" (34)?  This is the death of all their hopes and their realization of true evil.