If the merchant is not there with a quest for you, leave the game and resume to start the process over.

Head east and south along the edge of the map until you find a nook, travel into this nook and look for a merchant who will request assistance from the nearby mobs.

Use the way point to go straight to the Path to the Oasis. To find it create or join a game on the Blood and Sand quest of Act II. The vile of Liquid Rainbow is found in Act II on any difficulty. Since none of them can be traded, bought or sold you will need to find one of each for yourself along with the recipe and then craft your own staff. To craft a Staff of Herding you’ll need 5 difficult to find items. It’s loaded full of rainbow colored ponies and what not. The staff is then used to unlock the secret cow level in Diablo 3, which is actually called Whimyshire. Liquid Rainbow is a secret item hidden within the game for the sole purpose of crafting a Staff of Herding. The colors swirl and twist in hypnotic patterns.

Diablo 3 where to find rainbow liquid