Aboard the SS Anne (you need the ticket to board), past Gary, and in the captains quarters. (make sure you talk to the captain)
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Teach HM Cut to a Pokemon and use it on the tree.
How to get the hm cut in pokemon glaze
To my knowledge i don't think there is a waterfall in Pokemon yellow and it is quite irrelevant to the storline if there was one. If you mean a HM named waterfall...i think your on the wrong game, only pearl and diamond have waterfall HM...i think. There are only 5 HM's in Pokemon Yellow Flash, Cut, Fly, Surf, Strength.
only Pokemon with sharp claws can learn the hm cut
To get HM 01 Cut, walk to the top of Eterna Forest and try to reach the building that you need to cut the trees to get in. A Girl, who will reveal herself as Cynthia, will give you HM 01 Cut, after a bit of dialogue.