diff --git a/blueprints/ember-cli-typescript/index.js b/blueprints/ember-cli-typescript/index.js
index fd1ee7358..a23733821 100644
--- a/blueprints/ember-cli-typescript/index.js
+++ b/blueprints/ember-cli-typescript/index.js
@@ -40,7 +40,7 @@ module.exports = {
     }
 
     return {
-      includes: JSON.stringify(includes, null, 2).replace(/\n/g, '\n  '),
+      includes: JSON.stringify(includes.map(include => `${include}/**/*`), null, 2).replace(/\n/g, '\n  '),
       pathsFor: dasherizedName => {
         let appName = isAddon ? 'dummy' : dasherizedName;
         let paths = {
diff --git a/lib/utilities/compile.js b/lib/utilities/compile.js
index 137ecc09f..9576af3bb 100644
--- a/lib/utilities/compile.js
+++ b/lib/utilities/compile.js
@@ -4,7 +4,11 @@
 const chokidar = require('chokidar');
 const fs = require('fs-extra');
 const escapeRegex = require('escape-string-regexp');
-const debug = require('debug')('ember-cli-typescript:tsc:trace');
+const path = require('path');
+const glob = require('glob');
+
+const trace = require('debug')('ember-cli-typescript:tsc:trace');
+const debug = require('debug')('ember-cli-typescript:watcher');
 
 module.exports = function compile(project, tsOptions, callbacks) {
   // Ensure the output directory is created even if no files are generated
@@ -14,8 +18,8 @@ module.exports = function compile(project, tsOptions, callbacks) {
     rootDir: project.root,
     allowJs: false,
     noEmit: false,
-    diagnostics: debug.enabled,
-    extendedDiagnostics: debug.enabled
+    diagnostics: trace.enabled,
+    extendedDiagnostics: trace.enabled
   }, tsOptions);
 
   let ts = project.require('typescript');
@@ -30,7 +34,7 @@ function createWatchCompilerHost(ts, options, project, callbacks) {
   let host = ts.createWatchCompilerHost(
     configPath,
     options,
-    buildWatchHooks(project, ts.sys, callbacks),
+    buildWatchHooks(project, ts, callbacks),
     createProgram,
     diagnosticCallback(callbacks.reportDiagnostic),
     diagnosticCallback(callbacks.reportWatchStatus)
@@ -46,8 +50,8 @@ function createWatchCompilerHost(ts, options, project, callbacks) {
     }
   };
 
-  if (debug.enabled) {
-    host.trace = str => debug(str.trim());
+  if (trace.enabled) {
+    host.trace = str => trace(str.trim());
   }
 
   return host;
@@ -64,28 +68,53 @@ function diagnosticCallback(callback) {
   }
 }
 
-function buildWatchHooks(project, sys, callbacks) {
-  let root = escapeRegex(project.root);
-  let sep = `[/\\\\]`;
-  let patterns = ['\\..*?', 'dist', 'node_modules', 'tmp'];
-  let ignored = new RegExp(`^${root}${sep}(${patterns.join('|')})${sep}`);
+function buildWatchHooks(project, ts, callbacks) {
+  let ignorePatterns = ['\\..*?', 'dist', 'tmp', 'node_modules'];
 
-  return Object.assign({}, sys, {
+  return Object.assign({}, ts.sys, {
     watchFile: null,
-    watchDirectory(dir, callback) {
-      if (!fs.existsSync(dir)) return;
-
+    watchDirectory(rawDir, callback) {
+      if (!fs.existsSync(rawDir)) {
+        debug(`skipping watch for nonexistent directory %s`, rawDir);
+        return;
+      }
+
+      let dir = getCanonicalCapitalization(path.resolve(rawDir));
+      let ignored = buildIgnoreRegex(dir, ignorePatterns);
       let watcher = chokidar.watch(dir, { ignored, ignoreInitial: true });
+      debug(`watching directory %s %o`, dir, { ignored });
 
-      watcher.on('all', (type, path) => {
-        callback(path);
+      watcher.on('all', (type, rawPath) => {
+        let resolvedPath = path.resolve(rawPath);
 
-        if (path.endsWith('.ts') && callbacks.watchedFileChanged) {
+        debug(`%s: %s (for directory watch on %s)`, type, resolvedPath, dir);
+        callback(resolvedPath);
+
+        if (resolvedPath.endsWith('.ts') && callbacks.watchedFileChanged) {
           callbacks.watchedFileChanged();
         }
       });
 
-      return watcher;
+      return {
+        close() {
+          debug('closing watcher for %s', dir);
+          watcher.close();
+        }
+      };
     }
   });
 }
+
+function buildIgnoreRegex(rootDir, patterns) {
+  let base = escapeRegex(rootDir);
+  let sep = `[/\\\\]`;
+  return new RegExp(`^${base}${sep}(${patterns.join('|')})${sep}`, 'i');
+}
+
+// On case-insensitive file systems, tsc will normalize paths to be all lowercase,
+// but chokidar expects the paths it's given to watch to exactly match what it's
+// delivered in fs events.
+function getCanonicalCapitalization(rawPath) {
+  let normalized = rawPath.replace(/\\/g, '/').replace(/^[a-z]:/i, '');
+  return glob.sync(normalized, { nocase: true })[0];
+}
diff --git a/node-tests/blueprints/ember-cli-typescript-test.js b/node-tests/blueprints/ember-cli-typescript-test.js
index 382a115ad..3116b437e 100644
--- a/node-tests/blueprints/ember-cli-typescript-test.js
+++ b/node-tests/blueprints/ember-cli-typescript-test.js
@@ -71,7 +71,7 @@ describe('Acceptance: ember-cli-typescript generator', function() {
         expect(tsconfigJson.compilerOptions.inlineSourceMap).to.equal(true);
         expect(tsconfigJson.compilerOptions.inlineSources).to.equal(true);
 
-        expect(tsconfigJson.include).to.deep.equal(['app', 'tests', 'types']);
+        expect(tsconfigJson.include).to.deep.equal(['app/**/*', 'tests/**/*', 'types/**/*']);
 
         const projectTypes = file('types/my-app/index.d.ts');
         expect(projectTypes).to.exist;
@@ -116,7 +116,7 @@ describe('Acceptance: ember-cli-typescript generator', function() {
           '*': ['types/*'],
         });
 
-        expect(tsconfigJson.include).to.deep.equal(['app', 'addon', 'tests', 'types']);
+        expect(tsconfigJson.include).to.deep.equal(['app/**/*', 'addon/**/*', 'tests/**/*', 'types/**/*']);
 
         const projectTypes = file('types/dummy/index.d.ts');
         expect(projectTypes).to.exist;
@@ -159,7 +159,7 @@ describe('Acceptance: ember-cli-typescript generator', function() {
           '*': ['types/*'],
         });
 
-        expect(json.include).to.deep.equal(['app', 'tests', 'types', 'lib/my-addon-1', 'lib/my-addon-2']);
+        expect(json.include).to.deep.equal(['app/**/*', 'tests/**/*', 'types/**/*', 'lib/my-addon-1/**/*', 'lib/my-addon-2/**/*']);
 
         const projectTypes = file('types/my-app/index.d.ts');
         expect(projectTypes).to.exist;
@@ -194,7 +194,7 @@ describe('Acceptance: ember-cli-typescript generator', function() {
           '*': ['types/*'],
         });
 
-        expect(json.include).to.deep.equal(['app', 'tests', 'types', 'mirage']);
+        expect(json.include).to.deep.equal(['app/**/*', 'tests/**/*', 'types/**/*', 'mirage/**/*']);
       });
   });
 
@@ -224,7 +224,7 @@ describe('Acceptance: ember-cli-typescript generator', function() {
           '*': ['types/*'],
         });
 
-        expect(json.include).to.deep.equal(['app', 'addon', 'tests', 'types']);
+        expect(json.include).to.deep.equal(['app/**/*', 'addon/**/*', 'tests/**/*', 'types/**/*']);
       });
   });
 
diff --git a/package.json b/package.json
index 2e800b329..d785ce8c2 100644
--- a/package.json
+++ b/package.json
@@ -53,6 +53,7 @@
     "execa": "^0.9.0",
     "exists-sync": "^0.0.4",
     "fs-extra": "^5.0.0",
+    "glob": "^7.1.2",
     "inflection": "^1.12.0",
     "resolve": "^1.5.0",
     "rimraf": "^2.6.2",