I believe the documentation is missing something. On E Series devices, the hardware-controlled up/down pin is DIO6 for counter 0. The MIO demo box has one of the quadrature encoder lines connected to this input internally (there is no external connection for this). On M Series devices, the hardware-controlled up/down can be selected as any PFI line which, although it means the M Series devices have more functionality than E Series devices, unfortunately means it won't work exact the same was as described in that example for E Series devices. I haven't tried it yet, but you should be able to select the source of your count direction terminal (using the channel property node->Counter Input->Count Edges->Count Direction->Terminal) and then wire to one of the other inputs in the Demo Box.
I hope this helps!
gus....