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It should work. I use a variation of it. Years ago, Paco de Malaga (my guitar guru in Washington, DC) gave me the following advice to keep my guitars humidified. Place a wet kitchen sponge inside a plastic traveler's soap container with a top, with holes punched in the top. Place the soap dish (with the wet sponge inside and the top closed) inside the top of the guitar case, under the head. Obviously, the guitar case must be kept in the horizontal position. You only need the soap dish with sponge under the head. You don't need a separate humidifier near the body because the humidity appears to spread throughout the case evenly. I've been doing this for years, and it has worked well.
Bill
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Digital hygrometers are super cheap and you can buy ones that are calibratable (you can also just mark the + - on it). They can be calibrated using chemical solutions which give a specific humidity (table salt being the easiest at 75% but others will allow you to set more accurately in the usual reading range).
Using humidity sources like the sponge is fine as long as you are not flying blind. Over-humidifying a guitar can lead to all sorts of problems so you want to keep it ideally from going past 65% and really try to avoid getting up to 80% and higher. Guitars do survive living in humid climates although they tend not to sound their best, it's just that the chances of deformation from creep go up, and apart from the obvious problems that can result in a greater likelihood of cracking in low humidity.
Oh, I have experienced a case which didn't have much air exchange between the different sections, so although I would have preferred to keep my humidifier by the head, I had to keep it with the body to keep the RH up in that area.
what really matters is how the case functions. For example I have a couple cases with zippers that are air tight and I don't use any humidity. Somehow the guitar stays smelling "wet" in those cases, vs the normal latch kind. As mentioned you don't want too much unnecessary humidity unless you don't ever play the thing and it just is being stored in a collection. The process for a guitar is that it needs to breath and get used to inhaling water and getting rid of it slowly. If you don't give it a chance to dry slow and natural it will crack and or frets popping up, etc.
one quick question: why is it once humidity affects a guitar action; you can't restore it back to its normal action despite taking counter measures? For eg; in winters due to dryness here, the action lowers and the guitar starts buzzing often. Naturally, you humidify it. But it does nothing? The buzzing goes away only when the humidity change occurs in the entire atmosphere; i.e during the summer. Does it imply that the humidification we are doing is not enough?
It can go both ways. In the case of higher action in dry conditions it's often because the neck's relief can change based on the reaction of the fingerboard wood to the climate. The reason for this is as the fingerboard wood contracts or expands with the humidity the fret slots become slightly wider or narrower. A narrower slot will push against the fret tang, which can act to remove relief (straighten the neck) and lower the action, while a dry fingerboard can basically loosen the fret slot, which pushes less and allows the neck to pull into more relief. In the days before adjustable truss rods relief was often adjusted by the judicious use of frets with different tang widths. Common fret sizes with different tangs used to be fairly available, but it's not so easy to obtain them these days.
You can check this by checking the relief across the seasons. That's why people will tweak the relief on solid body electric guitars across the seasons by adjusting the truss rod. In those cases the body isn't part of the equation and the action changes are due to neck movement alone.
With your flamenco guitar the body also comes into play, so it's more complex. If you're experiencing the opposite reaction, in other words low action in dry conditions it's likely because the top is sinking. When it loses its arch, the bridge can sit lower with respect to the plane defined by the neck angle. It can take some time for a top to come back when humidity is reintroduced but sometimes it won't fully recover, it'll set in a semi collapsed state. Then you need to do some saddle adjustment.
Also, a guitar is a complex system. There's often not one single cause and effect. For instance, if the top is dry enough for the arch to pull flat then the rest of the wood is dry too. So there could be neck effects and the back and sides are also shifting dimensionally. The neck set itself can be moving. It's not a given that things are always predictable or there's cookie cutter explanations, either. I know I've probably been saying this too much in recent years, but the best way to deal with issues is by having a qualified tech do an in hand inspection of the guitar. These Internet forums can only get you so far.
Actually, looking at that sponge I would caution against over-humidification if the climate is warm. You're basically creating a Petrie dish inside the case and mold can develop. I've encountered this problem first hand, it's a real concern.