Can an issued landing clearance be replaced with "continue approach"?
The example is correct, except that the landing clearance for stack 1 must be cancelled before the takeoff clearance is given to stack 88. The logic is that only one aircraft can ever be cleared to land on or take off from a given runway at any one time. So in your example, you just have to swap the order of instructions 3 and 4.

Stack 1 cancel landing clearance, continue approach
Continue approach, Stack 1
Stack 88 runway 12 cleared for takeoff
Runway 12 cleared for takeoff, Stack 88
...
Stack 1 runway 12 cleared to land