My edit:

I was assuming you wanted a deformed Stretch-Armstrong like character with Popeye-esque arms and extremely short legs.  If that wasn't what you were going for, then you at least know what you need to change, heh.

The biggest edit I did was made your character's arms more relaxed, because even if they were just a big elastic curve, they would probably be affected by gravity when he's not moving them.

Also, selout can be horrible if done wrong (most advise against it, period), and it's definitely done wrong in your sprites.  You should use a more solid outline.

Where you mention the Morph planet uses "warm colors for foreground and cool colors for background", I notice they used green for an in-between.

Even with the darkened and desaturated background, I just can't UNSEE the fact that the tree tops are huge slabs of flatness after it was pointed, especially because the tree bases are so prominent in the picture.

That is me, though.  It may supposed to look like that.

Adam Atomic also right that the environment uses colors too close together and have straight ramps.  You could hue shift the shades gradually from the reddish brown into more yellowish browns in order to have a better connection to the green in the picture.  And a little more contrast is definitely welcome, because I found that contrast helps build shapes, while less contrasting objects tend to look more flat.  Try not to be extreme, though, since you don't want sprites to clash with the tiles.

You could also desaturate the solid background color to make foreground objects pop out even more.

And the worms have bad selout.  It's better that you keep outlines connected, especially for sprites as small as those.