Does that just mean
"someone is smiling and shaking his/her head"
"someone is laughing out loud?"
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It means to acknowledge some situation or something that someone has said, without making any further comment on the matter.
It is similar to bite one's tongue. You might want to say something, but the best thing to do in some situations is to just "bite your tongue" or "Smile and shake your head."
You might want to do this when someone says something (a) you don't agree with, (b) have heard them say 1000 times, or (c) when you have no idea what they are talking about. In all cases, you are disguising your true thoughts on the matter.
It is possible to imagine a commonplace dramatic (or melodramatic) context for this description:
'Two people on one sofa lean towards another person on the opposite sofa. They smile and shake their heads and, eventually, the one on her own starts to cry.'\
On TV shows and in the movies, this is often how someone is informed, without words, that their loved one "didn't make it", that is, has not survived emergency surgery, for example.