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Mulholland Dr. was upsetting, yeah, less directly than the Elephant Man was; watching it was like that pre-flu feeling you have in your stomach. I still feel that diner scene is one of the best terror/scary scene ever filmed and it's not even a scary movie. And the scenes with the cowboy are perfectly dreamlike and surreal. Of course the key is, after getting the basic underlying "story" of film, to treat it as an anti-cerebral emotional trip rather than a cohesive narrative
You're certainly right about that last part, seeing how "effective" the film was on me. I came in with all the "wrong" expectations about the significance of plot, etc., (and I even liked Eraserhead), so that the "twist" worked a little too well on me.
In fact, I felt betrayed long enough after watching it that I sort of stopped watching film altogether there for a while.