#1... Today they came back to where they where before the update.
Congratulations on this one... You must have done something right.
#2... suggest I keep removing links.
That's interesting that they sent you a specific recommendation. I haven't dealt with any Penguin penalties personally, but as I've read about them here, this is the first I remember where they're guiding you toward the specific problem.
Remove more links.
I'd take a look at these two references that might help you do this....
The other thing that we see is sometimes people think that disavow is the be all end all, the panacea that's going to cure all their ills. ...If you've been doing some bad SEO and you're trying to cure it, in an ideal world you would actually clean up as many links as you can off the actual web. That's just a really helpful way for us to see, when you're doing a reconsideration request, that you're putting in the effort to try to make sure that things have been corrected and cleaned up and are not going to happen again.