What you describe can not be done. you simply won't able to show the image when the user selects it. In order for the image to be displayed you need to upload it to your site first.
May be you can upload the image to temp folder using AJAX, then if the user decided to keep it move it to its permanent folder.
UPDATE: there are many ways to do it using ajax/jQuery. One example is here
http://www.zurb.com/playground/ajax_upload[
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