I lay it on, it seemed to work much better – I tried it both ways, but I don't have a steady hand so holding it over the top meant it was shaking a little and the images didn't come out quite as clear.  The stencil does stick to the icing a little which is why you don't get the smooth icing look, however, if you have a very steady hand, I suggest hovering it over the top if you do want it to look smoother.  Another way to do it is to cut a fondant circle to lay over the top of the cupcake and then use the colored food spray with the stencil. 

That is what I wondered! If it stuck to the frosting. Yours looks great though!

Cute Halloween idea. I like Martha Stewart’s Halloween cupcake stencils, too. Especially the chesire cat one.