The resolution is limited by the amount of memory in the ATmega328 microcontroller. It only has 2K of SRAM, so 1-bit depth (monochrome) resolution of 128×96 consumes 1.5K. You can go a little higher, like 136×96 or maybe 136×104, but you need to leave some SRAM for your program variables, stack, etc.
No color, only monochrome. This hardware cannot generate the analog waveforms required for color.