Elves are able to have more control over their bodies (hroa) because of the power of their spirit (fea). I think the scene was demonstrating that at one time Thranduil was wounded by a dragon in the past (either in Beleriand in the First Age or in the North of Eriador as he suggests). Elves can heal from terrible wounds but the memory of his wound lasts forever. Due to the extreme command over their bodies, he was able to bring the memory of the wound to the surface temporarily and then let it heal again. It?s a strange scene over all but there is some textual evidence to support it from more obscure sources. There is a theory that the reason Legolas is so light footed and walk above snow is similar to this natural ability that Elves have to change the way their bodies interact with matter and would explain how they can heal from mortal wounds if not killed.