Jerry, ours is horizontal to get hot water. If you look at the water lines at the back of the heater, the cold comes in the bottom and the hot comes out the top. The line that goes up and down between the two is the bypass line. The valve is where that up and down line junction into the incoming cold water line. When the valve points up, parallel to the up and down bypass line, the water goes up the bypass line and out the hot water line (cold water, though) and bypasses the heater. Turn the valve to parallel the incoming water line and the water flows straight through and into the tank. So, the valve handle should align with the direction of water flow. Hope this helps. Ours is an '03 3295 but I'd bet they're the same in this respect.
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