<p>How can you do a streaming read on a large XML file that contains a xs:sequence just below root element, without loading the whole file into a XDocument instance in memory?</p>

I think it's not possible if you want to use object model (i.e. XElement\XDocument) to query XML. Obviously, you can't build XML objects tree without reading enough data. However you can use
XmlReader
class.
The XmlReader class reads XML data
  from a stream or file. It provides
  non-cached, forward-only, read-only
  access to XML data.