You're right to be confused. The pattern isn't worded very well.
You've ended with a purl row to get to the 36.
Then it says to knit one row.
I think that you should cast on the 3 stitches and include the 'Next row' directions with that--that is, purl to the last 4 stitches, k2, kfb, k1.
Since you'll be increasing on every row, continue as you have been on rows 2 and 3, but without the knit 4 at the armhole edge
"Trust the pattern!"
Time flies like an arrow, but fruit flies like a banana.
Hop aboard while we follow the cloud-covered van of knitting harmony, man!! Woooo!! --Hedgehog
IngridKH on Ravelry