Trick question!
Looking at some pics (
Kevin's,
DBSS), the empty boat sits with the tranny in the water a little, and the nose an inch or two above the water. That's not the waterline I'd paint though- it'll look really goofy. I arbitrarily chose about an inch above the bow knuckle and above the chine at the transom as the two ends of my waterline. It looks fine, and should end up covering the wetted surface 90% of the time.
As for method, I used the string across level surfaces trick: level the boat (side to side mostly), then level a couple sticks off your bow and stern datum points (I used some adjustable sawhorses I have), then stretch a string over the sticks (I used spring clamps to weight the string end and provide tension), and make little tick marks where the string touches the hull- you move the bow and stern ends a little in opposite directions until the string just kisses the hull,
not so that it lays along the length for any distance. Then, using 1/2" or 3/4" 3M Fineline tape, connect the tick marks in as smooth a line as you can, sighting along as you go and redoing it until you're really happy with it.
waterline scribing day.jpg
waterline done.JPG