diff --git a/src/compiler/resolutionCache.ts b/src/compiler/resolutionCache.ts
index 01c7bc59fdd..0b6b676f7f6 100644
--- a/src/compiler/resolutionCache.ts
+++ b/src/compiler/resolutionCache.ts
@@ -588,7 +588,8 @@ namespace ts {
                 // Some file or directory in the watching directory is created
                 // Return early if it does not have any of the watching extension or not the custom failed lookup path
                 const dirOfFileOrDirectory = getDirectoryPath(fileOrDirectoryPath);
-                if (isNodeModulesAtTypesDirectory(dirOfFileOrDirectory) || isNodeModulesDirectory(dirOfFileOrDirectory)) {
+                if (isNodeModulesAtTypesDirectory(fileOrDirectoryPath) || isNodeModulesDirectory(fileOrDirectoryPath) ||
+                    isNodeModulesAtTypesDirectory(dirOfFileOrDirectory) || isNodeModulesDirectory(dirOfFileOrDirectory)) {
                     // Invalidate any resolution from this directory
                     isChangedFailedLookupLocation = location => {
                         const locationPath = resolutionHost.toPath(location);
diff --git a/src/harness/unittests/tscWatchMode.ts b/src/harness/unittests/tscWatchMode.ts
index 47116cd5b01..e056153518a 100644
--- a/src/harness/unittests/tscWatchMode.ts
+++ b/src/harness/unittests/tscWatchMode.ts
@@ -2113,6 +2113,28 @@ declare module "fs" {
                 };
             }
         });
+
+        it("works when renaming node_modules folder that already contains @types folder", () => {
+            const currentDirectory = "/user/username/projects/myproject";
+            const file: FileOrFolder = {
+                path: `${currentDirectory}/a.ts`,
+                content: `import * as q from "qqq";`
+            };
+            const module: FileOrFolder = {
+                path: `${currentDirectory}/node_modules2/@types/qqq/index.d.ts`,
+                content: "export {}"
+            };
+            const files = [file, module, libFile];
+            const host = createWatchedSystem(files, { currentDirectory });
+            const watch = createWatchOfFilesAndCompilerOptions([file.path], host);
+            checkProgramActualFiles(watch(), [file.path, libFile.path]);
+            checkOutputErrorsInitial(host, [getDiagnosticModuleNotFoundOfFile(watch(), file, "qqq")]);
+
+            host.renameFolder(`${currentDirectory}/node_modules2`, `${currentDirectory}/node_modules`);
+            host.runQueuedTimeoutCallbacks();
+            checkProgramActualFiles(watch(), [file.path, libFile.path, `${currentDirectory}/node_modules/@types/qqq/index.d.ts`]);
+            checkOutputErrorsIncremental(host, emptyArray);
+        });
     });
 
     describe("tsc-watch with when module emit is specified as node", () => {
diff --git a/src/harness/virtualFileSystemWithWatch.ts b/src/harness/virtualFileSystemWithWatch.ts
index 8b62c210abb..c206d219e2a 100644
--- a/src/harness/virtualFileSystemWithWatch.ts
+++ b/src/harness/virtualFileSystemWithWatch.ts
@@ -455,16 +455,24 @@ interface Array<T> {}`
             this.addFileOrFolderInFolder(baseFolder, newFolder);
 
             // Invoke watches for files in the folder as deleted (from old path)
-            for (const entry of folder.entries) {
-                Debug.assert(isFile(entry));
+            this.renameFolderEntries(folder, newFolder);
+        }
+
+        private renameFolderEntries(oldFolder: Folder, newFolder: Folder) {
+            for (const entry of oldFolder.entries) {
                 this.fs.delete(entry.path);
                 this.invokeFileWatcher(entry.fullPath, FileWatcherEventKind.Deleted);
 
-                entry.fullPath = combinePaths(newFullPath, getBaseFileName(entry.fullPath));
+                entry.fullPath = combinePaths(newFolder.fullPath, getBaseFileName(entry.fullPath));
                 entry.path = this.toPath(entry.fullPath);
-                newFolder.entries.push(entry);
+                if (newFolder !== oldFolder) {
+                    newFolder.entries.push(entry);
+                }
                 this.fs.set(entry.path, entry);
                 this.invokeFileWatcher(entry.fullPath, FileWatcherEventKind.Created);
+                if (isFolder(entry)) {
+                    this.renameFolderEntries(entry, entry);
+                }
             }
         }