The traveling merchant is in DKS, in the same place he was in D2:ED (with more gold and no random alchemy or enchantment ingredients that might obscure the malachite gem he has).
I described my encounter with him in the Who's playing DKS on nightmare difficulty ? topic, quoted below.

After reaching the bunker, disabling the barrier and visiting Dragon Cliff Castle, I returned to the battle tower to farm diamonds and malachite ore, so I could get all the gold from the traveling merchant on the path to High Hall and the harbour. The first encounter he offered me a ring a little better than one I had, so I bought it and the malachite gem, then sold stuff to get all the gold. Then I reloaded to try again, and got nothing (besides the gem). On my third try I got a bracelet (+5 Heightened Reflexes, +2 Ranger Strength, 2 charm slots and 1 enchantment slot), a belt (+49 HP, +48 mana, 2 charm slots, 1 enchantment), a bow with a level 9 Mana Leech enchantment and a cleaver with a level 10 Fire Curse enchantment. After selling all the diamonds and malachite ore I had, Carleton still had over 12k gold left, so I sold the plants I had on me, a couple pieces of alternate and older jewelry, some leggings I kept that were comparable in quality to the ones I was using and the belt I had equipped. Then I sold all my Healing, Revitalizing and Rejuvenation potions, figuring I could make more and that would clean up that section of inventory (so I didn't have 5 size versions of everything), as well as 51 chicken legs. That still left 2266 gold, but I wasn't reloading again, and had left more gold than that in Broken Valley (didn't think to make level 1 dexterity and resistance potions to sell, etc, as mentioned by Senior Cinco and Joram in the selling equipment topic).