Ask the audience if anyone has ever seen a pencil turn to rubber. Show your audience a pencil, or better yet take one from a volunteer. This is a good step to assure whomever you are showing the trick to that it is not a trick pencil.
Prove the pencil is real. Gently bend it, tap it against a hard surface or pass it around to the audience. This will give a second level of authenticity to your trick once you move the pencil in a mysterious way.
Hold the pencil between your thumb and forefinger. Keep a loose grip on the pencil, and keep other three fingers away from the pencil. You'll win or lose this trick with the grip, so it will take some practice to get the grip right, but once you learn it you'll never forget it.
Shake your hand up and down. Use tight, short swings and hold the pencil at eye level for whoever is watching. This is the other secret to the trick. Practice this with the grip and your trick should happen without any problems.
Watch as the pencil appears to turn to rubber and its ends begin to bend in your hand. What is actually happening is an optical illusion which occurs when the pencil wobbles from side to side as your hand goes up and down.