In this context, "the water" refers to the river.
The chapter starts by talking about the town on this river:
At that time Puddleby was only quite a small town. A river ran through
the middle of it; and over this river there was a very old stone
bridge, called Kingsbridge, which led you from the market-place on one
side to the churchyard on the other.
Sailing-ships came up this river from the sea and anchored near the
bridge. I used to go down and watch the sailors unloading the ships
upon the river-wall.
The water is hidden by the bend in the river. In other words, there are things - trees, buildings, low hills - that are now blocking the view of that part of the river. But the ships in that part of the river have tall sails, and even though you can't see the river, you can see the tops of the sails. And as the ships move, you can see the tops of the sails move (probably towards the sea).