I think one of the problems with the animation of the legs is that you have absolutely no horizontal movement in the knee. Get a mirror, stand in front of it and look at how the angle of your leg changes. Think of the leg as two parts, the thigh and calf. Here is a really crappy looking illustration:
This is a side view, though the same basic principle works in any perspective. In an effort to give the illusion that your character is moving up and down, you basically made his thigh stretch up and down. Then you made it so that his thigh and calf move up and down stretching the ankle. If you want to having him bobbing up and down the way that makes most sense, at least for a martial arts stance, is bending and unbending the knees ever so slightly. His torso doesn't move down because his leg gets shorter, it moves because his knee moves outwards, changing the angles of his calf and thigh. I suppose if you didn't want that kind of bobbing motion you could have him perched on the front of his foot (think muai thai), but it seems like that's not what you're going for.
And yes, it does look like he's touching his invisible dong.
