I know that God is not with everyone. I have been told he isn't with the proud and sinners. If that is so, why does it say he watches over them and yet is not with them... what? I am confused!

Psalm 138
Though the LORD is great, he cares for the humble, but he keeps his distance from the proud.

^^ the worldly, rebellious, etc.

Keep in mind that God is omnipresent. Being aware of what someone is doing and being WITH them are really two different things.

Please clarify the question. Specifically, what do you mean when you say "with" someone?

Great question, consider Psalms 37:10, 11, 29 (NWT)

"10 And just a little while longer, and the wicked one will be no more;
And you will certainly give attention to his place, and he will not be.

11 But the meek ones themselves will possess the earth,
And they will indeed find their exquisite delight in the abundance of peace."
...
29 The righteous themselves will possess the earth,
And they will reside forever upon it.

Indeed God (Jehovah / YHWH) calls out different futures for those who he finds wicked vs meek/righteous. He is certainly with those whom he finds righteous.

How does he make this determination? At least in part by his observations of our actions so he certainly watches everything that everyone does, both the righteous and unrighteous.

The verse is found on the OT while the LAW was his covenant with mankind. However verse certainly is applicable today too.

There are two types of people today those that are righteous and those that are unrighteous. It has nothing in the world to do with deeds. There isn't anyone that is good and righteous in and of themselves. It is the gift of righteousness that one receives when he believes on the Lord Jesus Christ.

What I believe this verse means( this side of the cross) is simply God see's and knows everyone intimately. However he only resides in those who call upon the name of the Lord Jesus Christ.