PSI's Dave Lien talks about iridescent clouds:

Almost everyone has seen a rainbow, but few people are aware of the other ways in which clouds can produce colors. Most clouds are made of tiny spherical drops of water with diameters usually between 1 - 10 microns (1/10th and 1/100th the width of the human hair), Most clouds consist of water droplets with a wide range of diameters, but under some circumstances, clouds can form whose water drops are all small (around 1 micron). It is these clouds which produce a colorful phenomenon known as iridescence, two examples of which are shown here.

A single water droplet produces a maximum iridescent effect when its circumference is identical to the wavelength, or color, of the light which hits it. The color we see from the cloud depends on the way in which our eye averages together the wavelengths of light which are close to the circumference of the droplet as well as the range of droplet diameters in the cloud.

I have seen iridescent clouds in all parts of the U.S. at almost every time of the year. However, the best examples I have seen in the northwest, midwest and eastern U.S. occur in winter (the examples above were taken in Pennsylvania on 1 January 2000). I have seen some wonderful examples of iridescent clouds in the southwest during the summer monsoon season, and am looking forward to see if the upcoming winter clouds in Tucson match those found in the rest of the country.

Iridescent clouds are most often seen close to the sun, which means that there is a potential for eye damage for the observer. DO NOT LOOK DIRECTLY AT THE SUN WHEN LOOKING FOR IRIDESCENT CLOUDS. Use a stationary object (edge of building, telephone pole, etc) to block out the direct sunlight. The scattered light from clouds near the sun may also overwhelm the light sensors in your eye, so wearing sunglasses is highly recommended (Note: sunglasses WILL NOT protect your eye from damage caused by direct sunlight, they will only improve your ability to detect colors in clouds near the sun).