Heat bluing is a chemical reaction, and different temperatures and different periods over the flame result in different colours, but my knowledge of heat treatment ends there. Then of course there are some makers (especially producers of fake watches in China), that paint the hands a bright blue. :-)
As for rust resistance I have no idea. Gun makers say that bluing of the steel parts on firearms does indeed increase rust resistance so I assume the same holds true for watches?
- SJX