Hold the pencil in his fist. Then turn the hand fingers to the audience. With his free hand and move the hand with the pencil from side to side. Pencil, as if alive, will rise up.
The secret is simple. As soon as the second hand will close from the spectators on the lower part of the knuckle with squeezed it with a pencil, thumb writes at the end of the pencil and slowly depress of his fist up. Distracting movement of the other hand will create the impression that the pencil was alive and moving by itself.