If I look up from the landing at the top door of Lovis (the one where you enter to meet skeleton merchant) there is a fancy chest way, way up! How can I reach it? Do I have to be in Dragon form? And where is Penelope's Amulet? I read somewhere that it is in a chest in Lovis. Is it THAT chest up there? Because I could not find it anywhere else! How do I get up there?!

Thanks!

Penelope amulet is beside a corpse while on your way up the tower. I not sure if you had to intersect with her grave first, but better to do so if you couldnt locate it. And the top most area only can be reach through the teleporting shrine which required password every time you step on it

ACSS is Penelope's grave in the graveyard in the village in Broken Valley?

Nope. Its on the grassland across the river where the enchanter smith is

Can't remember if I spoke to her or not ..... I just know I have had her medalion in my back pack and cnan't wear it or trash it..... Shouldn't it be in quest items area? I also have a two handed sword in my BP that is named weapon and I can't use it or destroy it either.

Just use penelope's amulet at her grave and you will be able to reveal a chests. If you are referring to arben's sword, it will be needed later for quest, if you want to. Else it stay forever in your inventory.