This simplified address decoder (a simple NAND gate) outputs a zero when a one is present on the given address line (note that P2 holds the upper part of address during MOVX). The addresses used in the program are then chosen so that they contain 0 for each other bit except the one which selects the desired I/O.

However, I see no reason why this scheme would not work with the AT89S8253. The code snippet you posted looks OK. Note however, that there is a rather unusually number of erratas for various revisions of the chip - have a look at Atmel's site.

JW