Alucinando translates to "hallucinating" or "dreaming/imagining things". It's a vivid and somewhat intense word that stands out from common vocabulary.
In the context of the song, the artist uses it to express how consumed he is by thoughts of a past love. He sings, "Me tiene' alucinando" (You have me hallucinating), implying that his mind is so fixated on this person that he's almost seeing or experiencing them even when they're not there. This word perfectly captures the obsessive and dreamlike state of his emotions.
This song is about missing someone you can't fully let go of. The singer keeps seeing her face and feeling her in his mind, even though he tries not to. Old memories won't leave him alone, showing up during the day and in his dreams at night.
He looks back and wonders why he messed things up when he had her close. In his dreams he gets to hold her again, but she disappears the moment he wakes up, leaving him chasing a feeling that isn't really there anymore.