1) An idiomatic question, meaning "What's going on?" or "What are you doing?"
2) A casual greeting, synonymous to "what's up?"
3) A phrase commonly used for seduction--a pick up line. Note alternative intonation. Usually ineffective.
The natural, most common response is "not much," due to the question's pragmatic similarty to "what's up?" A serious response, i.e. describing your current attire, may place you in a social out-group, and is generally not cool. May be considered a bit sketchy and is prone to misinterpretation when used online. Originally a contraction of "What you wearing?"
See also: watchu
Mitcho: Hey, Noah, whatchu wearin'?
Noah: Not much.
Noah: Yes, really.