I would consider not running the chair rail vertically, since it will only do this in one place, particularly if your tile has an available chair rail end cap piece.

If you stop running the pencil liner, you will also be changing the tile layout vertically:

Say heightwise up to the pencil liner you have 11 rows of subway tile @ 33". Add the pencil liner @ 1/4", so the next subway above that will be 36 -14", while the height of the next tile in the shower will be 36" ...the groutlines will be off. This may be fine if it is just isolated to the shower, but this misalignment may rear its head somewhere else. (Say at the other end of the shower where there is no chair rail and just a corner.)

It may be something that can be resolved easily, it may not, but it might be best to continue the pencil liner through the shower unless you come up with a layout solution in advance.

Yes, you've pointed out the exact problem. If I end the pencil liner before the shower tile, the subways will be off. It should be in the shower only, so it may work. I didn't really want to run the pencil liner in the shower, because it will be rather low on the shower wall (about 39" up) and since it's so skinny (½" - it's not like running a listello through the shower), that I'm afraid it will just look odd.

I'm attaching a link to a bathroom that will have a similar tile layout to what we will have installed. I couldn't really tell from the photos what was done in this bathroom, but it looks like the pencil liner was ended at the exact spot where the shower doors were installed. I'm a little worried about having to be that exact, however.

The chair rail for my tile does not have an end cap unfortunately. I was told at the tile store that two pieces can be mitered together, similar to how crown molding is ended. Not sure if this is accurate?

Here is a link that might be useful: Similar Tile Layout

finally remembered the name of the poster that did a fantastic tile job that I think incorporates some of the elements you are trying to do...

unfortunately I think a post with lots of other pics got lost, but you can get the idea! He has a pencil that doesn't run all the way, I think, and he miters the chair and those incredible cuts!

(Bill if you read this, this was the one I was trying to remember some weeks back :-)

Here is a link that might be useful: A few of codnuggets photos

Wow, that is some impressive work. I like the herringbone pattern too. I see he has crown molding in the shower, which in another thread I was trying to figure out how to install. I wonder if the crown molding goes over the tile or if the tile is installed up to the molding.