I've heard this theory a number of times. One of the easiest places to read about it is in Nick Strobel's excellent material about the Bethlehem star located at http://rampages.onramp.net/~binder/Xmastar.html. Here's an excerpt:
Chinese astronomers recorded a new star in the constellation Capricorn in March--April of 5 B.C.E. which was visible for over 70 days. This new star could have been a nova (short for the Latin nova stella ``new star''). A nova is caused by a white dwarf gathering enough material, usually from a nearby companion in a binary system, onto its surface to raise the surface pressure high enough for a thermonuclear explosion. The white dwarf's increase in brightness may be a factor of 10,000 to over one million. The increase to peak brightness is very rapid, within a few days, while the fading away to invisibility usually takes a few months. The new star observed by the Chinese would have appeared in the east several hours before sunrise (remember Matthew 2:2 ``...we observed his star at its rising''). However, Matthew 2:9 implies that the object was later visible in the south when the wise men headed south toward Bethlehem after their visit with King Herod. A nova would not have moved that much. The constellation Capricorn is well away from the galactic plane (by 30--40 degrees), where most stars in our galaxy (the Milky Way) are found. A nova occurring in Capricorn would be a very rare event.