The stream of human consciousness persists during sleep, albeit in altered form. Disconnected from external input, the mind and brain remain active, at times creating the bizarre sequences of thought and imagery that comprise “dreaming.” Yet despite substantial effort toward understanding this unique state of consciousness, no reliable neurophysiological indicator of dreaming has been discovered. Here, we identified electroencephalographic (EEG) correlates of dreaming using a within‐subjects design to characterize the EEG preceding awakenings from sleep onset, REM (rapid eye movement) sleep, and N2 (NREM Stage 2) sleep from which participants were asked to report their mental experience. During the transition into sleep, compared to periods during which participants reported thinking, emergence of dream imagery was associated with increased absolute power below 7 Hz. During later N2, dreaming conversely occurred during periods of decreased relative power below 1 Hz, accompanied by an increase in relative power above 4 Hz. No EEG predictors of dreaming were identified during REM. These observations suggest an inverted‐U relationship between dreaming and the prevalence of low‐frequency EEG rhythms, such that dreaming first emerges in concert with EEG slowing during the sleep‐wake transition, but then disappears as high‐amplitude slow oscillations come to dominate the recording during later N2 sleep.