Iridescent clouds, known as "fire rainbows" or "rainbow clouds," occur when sunlight diffracts off water droplets in the atmosphere. ... And sometimes moisture in that air suddenly condenses into tiny droplets to form a cap cloud." This "cap"—which scientists call a "pileus"—is the source of the brilliant spectacle.

How often does cloud iridescence occur?

Les Cowley … reports in his Atmospheric Optics site that from most locations in the U.S. they can be observed about five times a year, but from locations in northern Europe you might see them only once or twice.

Why does the clouds have a rainbow?

Clouds with rainbow colors

These sorts of clouds are caused by particularly tiny ice crystals or water droplets in the air. Larger ice crystals produce lunar or solar halos, but tiny ice crystals or water droplets cause light to be diffracted – spread out – creating this rainbow-like effect in the clouds.