Merging Photos using Layers and Masks
The Project is to "merge" these two photos.
Photoshop Elements
In PSE 8 and under there is no "masking" except for Adjustment Layers, and that gives us a work around if you need to make a mask in PSE 8 or less. Masking, just like in Photoshop was introduced in IN PSE 9. More on that later. Also note that there is no auto align layers "button/menu" in PSE.
Instead in PSE there is a "merge" Wizard that let's you accomplish this task, aligning and merging layers, all in one place.
Load the images in to the "bin" that you want to merge in PSE. Then toggle
Menu: New > Photomerge®Group Shot
You will see something like this...
There is an auto align feature in the wizard, and hidden "masks" that allow you to use a pencil or a brush tool to add or subtract what you want in the final image... Quite straight forward, but I found it to be more time consuming than using auto align and "masks" as in Photoshop.
Photoshop Photomerge Via Mask (and PSE 9 - 10)
Step One:
Load the two images to be merged into PS.
USE THE BRIDGE Menu Item:
Tools > Photoshop > Load Files into Photoshop Layers...
This method will automatically load the images, and unlock the layers.
(Here's a tip on how to stack (move) images already loaded in Photoshop into one layer palette/panel. See adding an image to a layer. )
Step Two:
Select both layers by holding down the Shift Key, you can also use the Command Key (Mac), Control key (PC), (using the command/control key lets you select non contiguous layers.)
Step Three:
Choose Menu:
Edit > Auto-Align Layers
Then choose Projection: "Auto" (Let the computer do the work)
Click OK
Step Four:
Select Layer 1 to make it active by clicking on it once (It'll turn blue) and then make a transparent mask by clicking the
button at the bottom of the layers palette. 
Step Five:
Click inside the "white" mask so you can see a black outline indicating it's active. Make the foreground color black (Toggle between black and white as the foreground color by pressing the "x" key on the keyboard)
Choose a soft-edged brush (Keyboard key "B") Paint black with the soft edged brush on the canvas over the areas you want to appear from the bottom layer. To see what's underneath you can make the top layer 50% transparent changing the Opacity setting at the upper right of the layers palette.
The results:
Photoshop Elements Layer Mask work around
Think of a mask as having black holes that allow the light from the layer below to shine through!
We can make a layer mask in Photoshop Elements by borrowing the mask from an adjustment layer, in this case we used "Levels". By grouping a duplicate layer with the previous layer,with the Levels Mask, we can borrow and use the levels mask as-if it were a regular layer mask.
Grouping
When you duplicate layer 1, move it above the Levels adjustment layer and select it. To make the duplicated layer "group" with the adjustment layer use the key board combination Control G (Mac) Command G (PC) or the menu Layer > Group with Previous.
The duplicated layer will move to the right and a little arrow will point down at the adjustment Layer. The PSE layer palette shows how the Photoshop Elements layers pallet work around works.
Now all you have to do is select the mask and paint with shades of gray to black to allow the effects in the layer below to show through.
Unlocking Photoshop Elements 8 and under.
Three web sites offer Photoshop’s way of doing things by unlocking Hidden Features in Photoshop Elements. They both offer a free demo-download that unlocks a few of the PSE's hidden features. The free demo from each company offers The Layer Mask for free!
The Hidden Power of Photoshop Elements
Give 'em a try!
If you have any questions… ‘
If not Practice, practice, practice