If I understand correctly, you sold a real watch to this person, and he sent you cash (?) by post which turned out to be counterfeit?
I'm sorry you experienced this. In future you need to get payment first, ideally a bank transfer.
If my understanding of the crime is correct, the police are not going to bother trying to track him down as (I assume) the dollar amount is low and you are not politically connected. However, you should definitely report it to the police, so at least they have a record of it. If he then scams another person in your country, the police will then see a pattern and might issue a warning about online scams.
You should also post the watch case number and story on forums like omegaforums.net and watchuseek.com, so it becomes harder for him to resell it.