Face away from the staircase you just came up, and walk along the edge of Mirkwood (as if you turned left at the staircase). 

You have to be quiet here. Shhhhhh...

Up ahead... is Merlin's Cave. He only comes out when he hears the duck singing Bieber, but we still have to be quiet. This is really important... Only one person can enter the cave at one time! Or else Merlin's not gonna be happy. Inside, there's a riddle (because Merlin doesn't do things by halves) which you have to solve to get the next password.