To find the Rainbow Liquid, a piece required to craft the Staff of Herding to unlock Whimsyshire, you will need to get to a waypoint in Act 2, to the 'Path of the Oasis'. Keep going until you've passed 'Cain's lost satchel' and take a sharp right to the south of the map into the desolate dead end where you may find some wraiths overwhelming a merchant. Kill them of and he will grant you passage into the 'Mysterious Cave". (if there's no merchant, try, try, try again!)
Once inside the mysterious cave, venture until you find a golden "Mysterious Chest" that looks like a resplendid chest, and therein you will find the elusive Rainbow Liquid. Once again, if there is no chest or loot, repeat your hunt from the beginning.