Alpaca Flags are flags that are set up (presumably) by Alpaca Jack's forces. Nine are required to be taken down for the challenge Fly the Flag, in the Dustbin Road area. Upon taking them down (which can be done just by touching them), they will be a flag with a cactus on it, most likely to resemble Cactus McCoy.
Upon starting the game, you will be on a zipline. When you reach the end, you will fall onto a platform. Jump as far left as you can, and you should land on a platform with a bell. Go down left, and you will see two Iron Crates and a Cactus McCoy Imposter. Defeat the Imposter and go left. You'll then see the first Alpaca Flag.
Note: Make sure to bring a Revolver/shooting weapon for this one. After crossing the second zipline, you will go right, then start hopping up on the rooftops, defeating Enemigos along the way. When you reach the rooftop (this one of stone) with the bell, there will be a rooftop downwards and to the left of it, also made of stone (note: you should have been on this one earlier when hopping up here). Hop down to it. You should see a wasp nest hanging from the ceiling to the left. Go back up to the other platform. To get this nest, it appears you have to jump down to the leftward platform while shooting to hit it. Then jump to the platform to the left, where the second Flag is.
As soon as you get the second flag, jump up to the ladder rungs to the left. Climb up them, then grab onto the zipline to the left. After reaching then end, there will be the third Flag.
While in the second room/section of the area, you will ride the first zipline in the room. Right before the end of it, jump off and land on the roof (NOT the one with the Cactus McCoy Imposter), where the fourth Flag will be.
After getting the fourth Flag, hop down. Go right, and jump onto the zipline. Go left when it ends, and then fall down through the wooden platform when you reach it. Go right, and grab onto the first zipline you see. At the end, it will drop you onto another zipline, which in turn should drop you beside a camp fire. Go right, and eventually you'll see the fifth Flag. To the right of it is a flag, jump up onto it, then left to the Flag. This is needed in order to get enough height to reach the Flag.
After getting the fifth Flag, go right, and you'll reach a rope; jump up and grab onto it. Then jump right to the ladder rungs. Climb up them, then hop op onto the rooftop. Go left to the end of this roof, ignoring the ladder rungs above. At the end you should see a rope to the left, jump over and grab onto it. Then jump left to the next one that is slightly upwards. After climbing to the end of this one, jump to the platform to the left, where the third Chest is (unless you have already gotten it). Go left, and you'll see the sixth Flag.
While in the third section of the area/room, hop up onto the zipline. At the end, it will drop you onto a second zipline. Right before the end of this one, jump to the right, and you will land beside the seventh flag.
If you just got the seventh Flag, hop over to the zipline to the left (the third one in the third room/section of the area). Right before the end of it, jump off left. Hop down to the left, and to the wooden platform is a rope. Go across it, then jump onto the platform with the eighth flag.
Do the same as done for the eighth Flag: jump off to the left of the third zipline right before the end of the of it. However, as you land, don't go left. Go right, and after going down some, you should reach a roof with a bell. Hop down, and you should see a wasp nest to the left if you haven't already gotten it. Go left, then jump to the left to grab the last Flag.