Saute chopped onion in 4 tablespoons of butter in a 10 inch covered skillet. Cook until onions are transparent. Add yellow squash which has been washed, ends removed, and sliced into 1/4 inch slices. Squash simmering will make its own water, so place the squash in on top of the onions and with the fire low, begin steaming the squash slowly in the covered skillet. Stir frequently. When the squash begins to make its own juice, add a light sprinkle of salt and pepper, then the diced water chestnuts. Continue to stew squash until squash is tender and the water is mostly cooked out. When the squash is falling apart, drain well in a colander. Pour into a large mixing bowl. Add the soup and the sour cream. Taste for salt and pepper. Pour squash mixture into a 9X13 baking dish that has been sprayed with cooking spray. Cover with foil and bake at 350 degrees until hot and bubbly. Remove foil, top with cheddar cheese, then top with can of French fried onions. Return to oven until onions are lightly browned.