Its a physical change......because we can get back the wool when we unknit it........any change is classified as a chemical change only when a new product is formed from the reaction.when a thing or a process  has only change in appearance and can be bought back to its normal form its classified as a physical change..
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There no formation of a new product. Also there is no chemical change in the action. You might think the sweater is a product... well it is formed by the same wool with no new substance.