Ouch! That looks like you saved it in the nick of time Avy! Id say POR15, or as I like to use that rustoleum rust converter paint and some satin black. very little rust has come back since i sprayed the entire T100 with it.
On another note, when my drivers side BJ failed it kept giving me weird feelings while I was turning-Im guessing it was moving up and down like yours was and if anything when I looked at it myself the wheel aint supposed to move up and down at all like I was getting 1 inch of play.