EDIT (June, 25th 2012):
The headache just doesn't go away...
Despite the photo below now I have a tube of black heatshrink shielding the sensor. It increase the analog output, for both cases (black and white). Regardless, the behaviour remains the same as without the shield when I move unto digital pins. I've been trying to deal with debouncing for the past couple of days with no luck.
// Playing with encoder digital readings
const int sensorPin = 7;