Lot's going on here.
Dogs are amazing at defusing a situation. I am always writing about how each dog is an individual; different than any other. Each has their own personal way of delivering a message but as a species there are great similarities. As far as body language, they use a universal one; but each dog has their own twist. Defusing a situation is very interesting to watch. A dog assesses a situation and deals with it in their own way. Depending on who a specific dog is as far as temperament and that particular dog's life experience will make the difference. Of course there are dog's who will always throw fuel on a fire and never consider defusing. But for those who do it and do it well, it is an art form. Mastery to behold.
Years ago I was at the beach for a photo shoot. I was there to shoot Sloughi's and my two models just so happened to live with one of the most savvy dogs that I have ever met. He was a big boy that looked like a St. Bernard mix. He had a presence about himself; an air of confidence. Not long after we arrived a German Shepherd dog came onto the scene. He spotted the big mix and decided to show him who owned the beach. The big St. mix stood watching the Shepherd approach, hair up, ears up with a direct and intense stare. As he got close enough to the big mix, the St. Bernard mix turned and walked away. This left the Shepherd standing in the sand wondering what had just happened. It was clear that the big mix was not concerned, apprehensive or even batting an eyelash over the bully Shepherd. Very cool.
Watching Elsa and Penny play I see the same behavior albeit down quite a few intensity notches. Penny loves to stalk Elsa which Elsa typically loves, but sometimes she doesn't want to be stalked. As Penny approaches in her stalking stance Elsa spots her; if she wants to defuse the stalking behavior she will turn and start sniffing the ground. She is displaying that she is busy doing something else; it always works. Penny has not got this defusing behavior down yet but with Elsa's guidance is shouldn't be long before she picks it up. As a puppy she hasn't needed it; she prefers to be in the thick of it at the moment.
Often when two very dominant dogs meet one will push and the other will turn and walk away. There is a huge difference in walking away and submitting. The entire body must be observed to see the difference. What does walking away without submitting mean? It means that the dog has no desire to interact; they are quite confident feeling no need to fight. A confident dominant dog does not necessarily want to fight, nor do they pick fights. They can be a very confident dog not feeling like they need to. Luke is much like this; he is a dominant male and very confident. He will not back down from a fight but will never pick one either. He is a lover not a fighter.
Then there is the learning aspect of it all. A far more mature and confident dog may display this behavior as a clear message of superiority. A sort of "I'm at the top, I don't do this," message. Of course there is always the dog that will not defuse and a fight or further pushing may follow. Each interaction, environmental stimulus and dog will be different so you can never be sure that defusing will work. But when it is used by between two experienced and confident dogs it is amazing.
Dogs are far more experienced and talented at reading and delivering messages than we will ever be. They do it all without a word spoken. It is the humans that fail to read a dog correctly; there is so much to know and understand. Many people have it all wrong; they read and interpret their dog's behavior completely inaccurately. With this comes misguided reactions to their dogs actions. It must be frustrating to be a well versed dog who is completely misunderstood by their owner. It is more than worth the effort to learn about canine behaviors if you are indeed going to live with one.