This displacement technique is a speciality of the ninja from Kirigakure, where one causes a mist to spring forth by lifting up some water from either a pre-existing source or expelled from their mouth, then goes in and out of sight at will from within the pearly-white realm. The mist's thickness is controlled by the amount of chakra kneaded into it. It can't fool the Byakugan, but, due to the mist being created with the user's chakra, any Sharingan and Rinnegan-user will see the mist coloured by their opponent's chakra, which will effectively hide the user from the dōjutsu.
When Kakashi uses this in the anime, Itachi claims that the mist does not prevent him from using his Sharingan, contradicting both the manga and earlier anime scenes.
Certain skilled users, such as Zabuza Momochi, can utilise this technique without an identifiable water source.