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As others have pointed out, the [flagged] annotation means heavily flagged. A story can be downweighted off the front page by user flags long before [flagged] shows up. Indeed that's what happened to the submission the OP is complaining about. Moderators never saw it.

When does the flag label appear though?

Here's an example of a submission that does not include the [flagged] label, but which has a moderator saying it got flagged, and that the flags are the reason it's not on the front page. https://news.ycombinator.com/item?id=13741276

Just a few flags from high karma accounts can knock a submission off the front page if it isn't getting enough counter up-votes. It wont be marked as flagged.

Flags seem to apply downward pressure before they build enough to get the "flagged" label.

Flags downrank a post, a post can drop off the front page well before 'flagged' shows up.