After paying Watts to reforge your blade and watching the sprite's sad show, Tropicallo attacks the village.
The green things (bramblers) will put out vines that slowly creep toward you. Stay away from these and wait for Tropicallo to stick its head out. Hit Tropicallo when it sticks its head out, but try to wait until its head is all the way out of the ground or your attack might miss. Tropicallo also spits pumpkin bombs that explode if they touch you, so run away from them.
For defeating Tropicallo, you get the Spear Orb. When the Elder asks you to take the Sprite Child with you, say yes, and give the Sprite a name. The Sprite's official name is Popoi (sometimes spelled Popoie).
Be sure to talk to the Elder after Popoi joins you. You will get the bow and arrows.
There is an underground castle to the north, but Elinee has sealed it, so instead you will have to head to the Haunted Forest.
Watts is looking for you, so go visit him to get the axe. He will open a shortcut, but don't go through yet. Instead, go upgrade the Sprite's equipment.
Now you can go back to the Haunted Forest. Use Watts's shortcut to reach Neko's cave, then go outside and head to the northwest of Gaia's Navel. Go north and use the warp point to reach the Haunted Forest.