"I like the watch in that color."
Translation:Eu gosto do relógio nessa cor.
Aquele and esse/a both mean that but their meaning a kinda different.
Esse/a- means that one or that one specific thing. E.g. Quero esse cavalo/I want that one horse. (specifically)
Aquele/a- means that one over there. E.g. Você vê aquela árvore?/ Do you see that tree over there? (not a tree close by, but farther away)
Naquela = em+aquela
Nessa = em+essa
Now, the reason nessa is used instead of naquela is that nessa gives the indication of this watch color specifically. Here is a more detailed translation of each preposition being used in the same sentence:
Eu gosto do relógio nessa cor.
I like the watch in that specific color.
Eu gosto do relógio naquela cor.
I like the watch in that color over there. (Think like you're in the store, and the color that you want the watch in is away from you).