Refer to the arrows on the screen and move your hand up and down in a vertical motion. Meanwhile, the loose grip on the end of the pencil allows the other end of the pencil to bounce around. The combined movements of your hand and pencil will make it appear as if the pencil is bending.
You don't have to move real fast. As a start, try moving your hand up and down twice in about a second. Experiment and speed up and slow down until you have the right speed. Remember that the key to the trick is holding the pencil with a very loose grip so it can bounce around.