I tend to think the story's true because we've seen Norman going in and out of fugue states already. Remember him trying to hit Dylan with the meat tenderizer because Dylan had Norma programmed as "the whore" on his phone? Then the next day when Dylan talked to him on the couch, Norman didn't believe him. Norman's blacked out in class, too.
This week's episode was very good. I'm looking forward to seeing how they get out of this. I wonder if Dylan is going to take the fall for everything.
I hope Norma's past the point where she would throw Dylan to the wolves to protect Norman or herself. Dylan is sooooo doomed. The only question is when. His good intentions will get him killed at some point down the road. When will Norman snap and do it? That's the question. Dylan's being set up for a tragic death.