Yes. It's incorrect. It's very informal and possibly accepted in certain contexts, such as texting. The meaning would be in the present tense.... "What are you watching?"

Yes, it's grammatically incorrect but also common to say.

Yes, you're right. In standard English, it's incorrect. If you found it in a message, it's actually a slangy use of grammar (in the same way as "boys be like..."), but please don't use it. You'll sound like a wannabe rapper, and native speakers will think you're trying too hard to seem "cool". I hope you're also talking to native speakers who use English normally. There's no point in copying bad examples. ;)

In very informal situations like writing a text, you might omit the verb and just write 'what you watching?.' I am suspicious that your friend actually said that. My suspicion is that he actually said 'What've you been watching?' quickly and you didn't quite pick it up.

grammatically*