A pic of some decaling trouble I'm having...

Try NOT blotting the water off.

Also, consider applying a coat of MicroScale Decal Saver over the printed surface. Maybe the decals are reacting to the setting agent improperly and having this barrier may change that.

At this point, there isn't much to loose.

Mmm... ok. There is Future on it, but it's not as glossy as usual. The paint almost seemed to absorb some of it. At this point I have only done the tail, so I'll try another coat of future before continuing, see if that helps.

I may be wrong here, but your paint appears to be flat. If so, that is the problem.

When using setting solutions, the surface must be gloss, otherwise the decal will wrinkle as it's supposed to, but it will tend to get "hung up" on a flat surface instead of levelling out as it dries.