It's literally a ridge of high land dividing two areas that are drained by different river systems; figuratively, it means a turning point -- a moment in time that involves a decision or event that changes the course of the past and leads someplace else.
In river parlance, it generally means the entire area of land which is drained by a given river. For example, the Mississippi River watershed ranges from the Continental Divide in the Rocky Mountains of the west to the Appalachian Mountains in the east and from the state of Minnesota southward to the Gulf of Mexico. It covers an area of approximately 1.15 million square miles. See the related link below for a map of the Mississippi watershed.