Which should I choose to allow the FlashMagic and CPEC programs to start the ISP sequence?
What is CPEC? somebody trying to reinvent the wheel?. I send 'qwerty' on the 232 port to start ISP.

I was thinking of connecting the DTR (which is supposed to reset the board) to my reset chip. When DTR goes low, the chip goes high to reset it.
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I was thinking of having !PSEN on a jumper/switch, but I don't know the behaviour of the FlashMagic and CPEC programs, do they reboot the board at the end?
yes FlashMagic will , if you specify so, it starts the watchdog and do not referesh it.
***This is my important question***: if so, I would have to release the !PSEN before it gets reset,
You use NoTouch, why are you mucking with PSEN

For the ALE, P2.6, P2.7, I will pull these high with a 10K resistor.
That is fine, the one on ALE is not needed

My next question is about using SDCC with the safe NoTouch + Touch technique. Has anyone tried this? I like the idea of using the TX line to go into safe mode...
Safe mode ??? as described it will start the ISP.

has anyone done this with a MAX232 chip? If the TX input is floating, will the TXoutput float as well, or should I use a 10K pullup resistor on here as well.
Nothing is floating, the '51 has weak pullups on these pins.

Erik