I've been waiting to use this for a few days now, so this girl in my class grabs puts her hand on my shoulder and starts kind of massaging it. So I go "Hands off the merchandise." and she seemed shocked and astounded and just repeats it like "Hands off the merchandise????"

I followed it up with something like "Yeah, this shit ain't cheap." After that it died down, but later she started grabbing my watch while my arm was hanging off my chair and grabbing my fingers. Should I take all these shoulder grabs and touches as false IOIs? In my opinion she's known to do that.

I might add it's also hilarious that I was reading The Game earlier and she asked me if I was trying to pick up chicks.

So after the first Hands off the Merchandise...you can let her touch you after that. I like your response btw, "this shit ain't cheap..." is classic. I also like using, "I'm not your boyfriend" as a followup and a slight disqualifier implying I wouldn't be.

Kino is taken as an IOI. The only reason to believe them to be false if you think that she is doing it for another reason. What else does she have to gain by doing this?

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Been around the world twice, Talked to everyone once...

"I'm not your boyfriend." Very nice, that's going to be put to work.

Months ago I used to fall in this girl's trap and lose....

But also, what kind of neg could I attack her with when she asks me to smell her hair? It smelled quite nice, but I didn't want to tell her that. Couldn't think of anything else except "Smells like smoke." (She was smoking cigarettes just before class).

I rarely use "hands off the merchandise" because it just isn't me (I do use other ones though, just not that exact one). It seems false. Maybe that's your problem - she didn't think it was like you.
Or, maybe, she just didn't get it, in which case your comeback was great.