The reasoning behind exchange flows is simple: coins move to exchanges to be sold and away from them to be held. The evidence is messier, because exchanges move coins for their own reasons all the time.
Why a balance chart needs care
An exchange balance is only as good as the address list behind it. A new wallet the list doesn't know about looks like a large outflow. An exchange that consolidates customer funds or adds a custody partner can shift billions with no change in anyone's position. Check coverage notes before reading a single day's move as a trend.
What actually carries information
Persistent multi-week drops in balances across several exchanges, large one-way moves that aren't matched by a move elsewhere, and stablecoins arriving on exchanges just before a rally are all more convincing than a single spike. Combine flows with other evidence: if coins are leaving exchanges and ETF holdings are rising at the same time, the story hangs together.
Proof of reserves
When an exchange publishes its wallet addresses, its reserves can be checked on-chain against its claims. It's a far better basis than guessing, though liabilities are harder to verify from the outside.