I was thinking about putting some stitches from the bottom of the sleeve on waste yarn, as well as the same number where it would connect to the sweater (to later join with the three needle bind off), then just knit and pick up the sleeve stitches and continue around. Do I need to do anything different at the seam where the arm and sweater meet, like knit two together all the way up, or some sort of shaping once it reaches the top of the shoulder? Does anyone know of a free pattern that follows this type of design? Is this even possible or would it not work?
Oh yes, it works and you can look at this pattern http://www.knitty.com/ISSUEfall02/PATTtopsecret.html - for ideas.
Yes, it's useful to put the underarm sts, both from the body and the sleeves, on holders, then you can graft them together. You can do raglan shaping, which is k2tog/ssk where the front/sleeve and back/sleeve joins are. That's 4 spots and you do both decs at each point on every other round. In the pattern I linked, it's a yoked top rather than a raglan, and you dec a lot of stitches every couple of inches.