Load Balancing on Amazon (AWS) and staying up to date
Solution 1:
A different approach that can work with AWS is to store the updated site/data/config somewhere like S3. Configure the AMI (or specify appropriate user-data script) so that when a new instance is spun up, it updates itself. You can prevent it from being added to the load balancer by not responding positively to the health check until the updates have completed.
Otherwise, if you need to have the instances come up faster, then your approach seems reasonable. Just make sure you suspend auto scaling before you start updating the live instances and resume after the new launch config. You don't want it starting instances that are not updated.
I'm also not sure if you can delete a launch config that is in use by an ELB. That step may have to wait until after it's been replaced. Post an update here when you find out.
Solution 2:
I ran into the same problem as you. I've got an auto scaling group that scales up an down with traffic and I push updates all the time even under peak load. My solution is quite a bit more involved since I need a staging area to be able to test my code updates before they hit live servers. At its simplest level here's how I build / update my servers.
Build base AMI - This is the AMI without any source code, this AMI can be bundled with 3rd party applications that you need or not. For example, one of my servers I need AppFabric, IIS, AWSSDK.NET and .NET 4.0. I install all of those tools and save the ami. My linux servers I do this at runtime since its much faster.
Store source code in S3 or SVN - When your server starts it grabs the latest code from SVN or S3. To update existing servers just terminate them one at a time or in groups and the Auto Scaling group will start another with the latest code.
Depending on how tolerant your service is to failures you can also implement a staging server like I have to test the new code before requests start getting sent. My setup requires two auto scaling groups. The first group is basically my security and authentication layer which uses php code. Once the request has been validated it gets forwarded to another auto scaling group.
Updates to the security authentication layer still require the steps explained by myself and Eric Hammond. However, I try not to update this code very much, it doesn't contain any business logic and almost never changes. Changes to this layer should always be backwards compatible so that if you do make updates you can have 2 versions of the servers online at once without any problems.
Updates to the business layer is where I apply all my code changes to upgrade features, fix bugs etc. The trick is to create another auto scaling group / loadbalancer when making updates with its own servers and code ( again from SVN or S3 ). Once you've tested it you update the local dns server ( assuming you have one ) and the security authentication layer automatically starts using the new servers.
Edit: Forgot to add this link http://www.slideshare.net/AmazonWebServices/aws-architectingjvariafinal. Has some very good information on solving this type of problem and a few other things that you may or may not know about aws.