[spoiler warning]


that's the most likely interpretation, but there are three ways you can look at it:


1_everything of the 1960's is a hallucination from Noodles when he's on opium, a drug which was rumored to have this effect you had visions of the future

this is the most likely one because of the opium-den scenes, the 'dreamy' cinematography of the 1968 part and comments of the screenwriters and director themselves.

2_the 1968-part DID happen and Max DID betray Noodles, 'stealing' his life his girl his money everything.

this would not explain the opium scenes, however it would make more sense of the accuracy of the 1968-settings (Beatles music, television, cars etc.)

3_Baily really exists, but old Noodles' sees Max's face as if old wounds had not yet healed.

this is the least logical explanation, however it is quite common to the movie you have been watching the 3 hours before; Max is really dead, and no hallucinations


with all fairness, the first is by far the best explanation. the reason for Noodle's opium-hallucination would be his guilt for letting Max get killed, and the life/lives that were destroyed because of that.