After Teddy joins you, your team should be powerful enough to defeat the Dragon in the Crystal Caverns of Magicant.

Find the Dragon

After Teddy joins you, use the Onyx Hook to go back to Magicant and get a Magic Coin, Gold Ring, and H2o Pendant for Teddy. Also give Teddy the Sword that you found in the Crystal Caverns earlier in the game. Visit the Mysterious Goods Keeper in Magicant if you left the sword with Minnie.

If Ninten is not level 25 yet, fight battles in northern Magicant until he is.

Now go into the Crystal Caverns under Magicant and find the sleeping dragon. Use Check on the dragon (not Talk) to wake it up.

Dragon

Have Ninten use Defense Up β on his first turn, then Offense Up on Teddy on his second turn, then Offense Up on himself on his third turn. Have Ana use PSI Block, then keep everyone healed up after that, while Ninten and Teddy attack. If Ana dies, don't worry too much. Offense Up on Ninten and Teddy will allow them to finish the battle fairly quickly.

After the battle, talk to the dragon to learn the sixth melody.

Now use the Onyx Hook to go back to Magicant and heal up as needed, then go to an open area (such as the area west of Queen Mary's castle) and use Teleport to go back to Ellay (a.k.a. Valentine in the fan translation).

Now it is time to visit Mt. Itoi.