You're supposed to lose to the Gyarados.
Does it even have Water Pulse? You need to open up its heart a bit before it starts regaining moves, so I assumed it only knew Shadow moves. If it does, I guess you could try luring it into using it by sending out a Geodude or something.
Rocks and bushes are the most common places to find them. You'll be able to get an Itemfinder later in the game, which helps a lot.