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She was wearing a sweater she had knitted herself.
Literal
She [topic-は] [by-herself-自分で] knitted sweater [object-を] was-wearing.
自分で編んだセーター ('a sweater she knitted herself') is a relative clause: 自分で (by herself) + 編んだ (past attributive of 編む 'to knit') sits before セーター ('sweater,' from English) as a modifier. Past progressive 着ていた describes an ongoing state at a past reference time — at that moment, she was in the sweater. The wearable testifies to the handcraft.