This describes vessels signaling to each other by light flashes to avoid collision. "Dot dash" is "A"; in nautical signaling, A (alpha) is one of the "keep clear" signals, specifically saying "diver down below". Someone describes the scene: mist closing in & thickening, one of the vessels whose signal had been sighted drops out, while the flashes from the other vessel quicken. Then the lights dim, indicating greater distance or thicker fog. "The chances smaller, the odds are slimmer" might refer to the diminishing chance of the diver's finding whatever the dive was for. "Loosening my grip" on the steering apparatus, but still referring to measures taken to steer the boat so as not to crash into the other.

This may be a metaphor for something, and I've little idea what the 2nd half of the lyrics are saying.