CTCP ACTION is a "hack" in the irc protocol to allow for emotes.
Normally, CTCP (client-to-client-protocol) commands are sent as privmsgs to clients, and usually require a notice back, like CTCP TIME and CTCP PING <number>.
CTCP ACTION is a special CTCP command that's usually sent to channels instead of other clients, and doesn't require a return value.
The clients then display that as an emote. a CTCP ACTION "freaks out" from MonkeyBoy would usually be displayed as "** MonkeyBoy freaks out"
To send a CTCP ACTION (or emote) in most irc clients, you just enter "/ me jumps around" (without the space between / and me) in the desired room, but entering "/ctcp #room ACTION jumps around" usually works as well.
Type "/ me freaks out", without the space between the "/" and the "me".
[edit: "client-to-client-commands"? heh]