The open as smart object command is designed to work with PS not Elements. There is limited functionality in elements but you can open files directly e.g. into another document or image using the menu in Expert mode:
File >> Place
Click the green checkmark and the layer becomes a smart object. You can then use the move tool (and bounding box) e.g. to stretch or scale the object without pixilation.
I am really wondering about this anwer, because it worked with a time limted trial version of elements a few months ago. I just take the decision to buy elements this week because of this feature and now it does not work.
I will check if the "workaround" support the workflows I have in mind.
The standard command will work from Lightroom
Edit In >> Photoshop Elements Editor
Could that be what you were seeing?
I have preferences (external editing) set to PSD and 8 bit files which offer maximum flexibility in PSE as 16 bit editing is limited.
I believe some users have installed the Elemental plug-in.
That Plugin works quite well, but still not as I expected to work with both programs. Maybe they removed the feature from the elements series, but I really remember to be able to work on different smart objects on different layers. With the plugin I just can work with 1 smart object per psd file (or is there any other workflwo to do so?)
It was definitly working with many layers as smart objects within one opsd file, not working with just a copy. I remember that I was made some combustion with a series of firework.