Nothing is wrong, you just can't make non-visual components using the MXML Component autocomplete.
But not saying the autocomplete, it doesn't even let me click "Finish" button. And what's the reason they do this? It used to be able to add any non-visual component in flex 3.
Perhaps you've forgotten that you were really creating a new ActionScript class (further down the right-click context menu), not an MXML component. You still get the usual autocomplete AS class extension dialog. I know they did change the UI a bit from FB3 to 4, so I think that's what is confusing you.
Actually, I am really creating a MXML component, not an actionscript class. My syntax is something like
This is not an actionscript syntax. I tried the actionscript class you mentioned, it automatically generated the syntax like
public class test extends Sequence
public function test(target:Object=null)
This is actionscript syntax, not really what I want. On top of that, the extension is .as, not .mxml
I'm pretty sure the top level tag of any MMXML component must be a visual component--I.E. either UIComponent or a class that extends it. Sequence is not one of those.
After creating a component, you can try to change the top level class; although I can't guarantee it'll work.
The way to work around this is to first choose "Group" or any random visible component in the create MXML component dialog window, and manually modify the tag after creation. I tested it, it compiles fine and works fine. The compiler has no problem with non-visible component as top level tag. Adobe does not have any documentation saying about not having non-visible component as top level tag.
Adobe actually has an example on their official site demonstration a non-visible component could be a top level tag, unless they didn't fix the documentation when updating from flex 3 to flex 4. See here and go to section "Creating a custom data effect in a separate MXML file":
File a bug at bugs.adobe.com/flex and I'd vote for it. I'm glad to hear it does work, even if it is a tedious way to do it.