I say balloon, it would be more accurate to say lantern - like the ones in the picture I posted. You set alight to a fuel source inside the "balloon" and the hot air causes it to fly away, just like a regular hot air balloon.
These things are not only used at Chinese festivals and such but are also created by kids for science projects and alike. I'm pretty sure I made one as a kid.
I'm not saying thing is defiantly what you saw, it could've been some kind of weather balloon with an attached light source, it could've been a plane flying towards or away from you creating the illusion that it was bobbing up and down in a stationary position when in fact it was moving along a Z axis to your vision and bobbing as a result of the changes in air pressure. Light planes would be particulalry suseptable to this.