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The lyrics of "All Along the Watchtower" are written in rhyming couplets. The rhymes are simple (thief/relief, fate/late), so they don't sound forced at all. Unlike many song lyrics, which make no sense without the melody, "All Along the Watchtower" reads like poetry on the page. Each line is divided into two sections of about 5-8 syllables, with a pause in between. The first section of every line has an accent on one of the syllables, which Dylan sings to the hilt on the recorded version: "There must be some way OUT of here!" These over-the-top accents are one of Dylan's signature moves – nobody else can pull it off quite the same – and Hendrix wisely avoids trying to emulate them on his cover version.

As for the form, the song isn't really a ballad, because it doesn't tell anything like a story, despite having elements of storytelling (dialogue, characters, etc.). Dylan makes this point explicitly in an interview from 1968:

I haven't fulfilled the balladeer's job. A balladeer can sit down and sing three songs for an hour and a half... it can all unfold to you. These melodies on John Wesley Harding lack this traditional sense of time. As with the third verse of 'The Wicked Messenger', which opens it up, and then the time schedule takes a jump and soon the song becomes wider . . .The same thing is true of the song 'All Along the Watchtower', which opens up in a slightly different way, in a stranger way, for we have the cycle of events working in a rather reverse order. (Source: Jonathon Cott, ed. Dylan on Dylan: The Essential Interviews, pg. 122)

The lyrics are more anecdotal than anything else, and they lack a clear sense of resolution. In this way, the song resembles a lot of early Chinese poetry. Many of the great classical Chinese poems end on a confusing or dissonant line, often about some natural event that doesn't seem to have any obvious connection to the rest of the poem. "All Along the Watchtower" similarly trails off into an ominous focus on the sudden change of weather. It ends on a note of Zen-like confusion, with the howling of the wind.

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