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If you move your mouse quickly, and get outside of the width of the knife, would it stop following the mouse?

You could make it just follow the mouse all the time, and not insist that the user has to initially point at the knife. You could have code like this ('knife' is the instance name you gave the knife movieclip in the Properties panel):

addEventListener(Event.ENTER_FRAME,moveknife);

function moveknife(e:MouseEvent){

knife.x = stage.mouseX;
}

If you want to make sure the mouse is within the knife, you could do this:

addEventListener(Event.ENTER_FRAME, moveknife);

function moveknife(e: Event) {

  if (knife.hitTestPoint(stage.mouseX, stage.mouseY, true)) {

      knife.x = stage.mouseX;

  }

}

You'll see though that it's easy to move away from the knife and lose control of it.