It's not really possible to answer this question without knowing how sweet the watermelon was. That is, we need to the watermelon's brix.
When you added the watermelon, you added some water and some sugar. The sugar will ferment, increasing the alcohol content and the water will dilute, decreasing the alcohol content.
According to this page, watermelons average around 10 brix, which corresponds to a specific gravity of 1.040. Given that the sugars in watermelon juice are 100% fermentable, unlike beer wort, which is around 75% fermentable, I would expect the watermelon to contribute roughly the same amount of water and sugar to the beer as the wort. That is, after all is said and done, the beer will have the same alcohol percentage, while the volume will have increased.
So it's a bit surprising that the gravity dropped after the watermelon had fermented. There are two possibilities. 1) the watermelon was sweeter than 10 brix, and the extra alcohol it contributed is lowering the specific gravity, or 2) it was less than 10 bris, and the added water is diluting the beer and lowering the specific gravity.
Not much of an answer, I'm sorry to say.
One thing you can do, if you have access to a refractometer, is estimate the beer's overall starting gravity by plugging the refractometer and hydrometer reading into a calculator like the third one on this page. You can enter the estimated original gravity and measured final gravity into an ABV calculator to get an estimated alcohol percentage for the beer.