The formal form for "you"(=Sie) has to be written/said in a german imperative. Without "Sie" the german imperative is not complete.
--> Schauen Sie nicht.
Here the verb "schauen" is negated. --> nicht schauen ; "schauen nicht" is not correct German in case there aren't other words surround these two words.
I think 'see' is the general word for getting information from your eyes. Here you should not look at something (for example at the little box in my hands, because it will become your birthday present). Nobody said you should close your eyes, you only should look at something else than your present. You could watch TV, while your present get prepaired.
"Don't look" would be the most direct translation, but "peek" works too. "Schauen" is better translated as "look" (pointing your eyes somewhere to see it) than "see." You can only "not see" by closing your eyes, but you can "not look" by turning your head the other way.
It's not correct. Duo is trained to accept "ue" as a substitute for "ü" for people who can't easily type "ü" (and likewise for "ae/oe"), and it's just wrongly applying that rule backwards here because it's a machine and doesn't really understand how this works. "Schaün" is not a correct spelling.