Rotary with Espruino Pico

This may help:
https://www.espruino.com/Pico+Buttons
Using the button and LED on the Pico

clearWatch(); // remove our last watch
setWatch(function(e) {
  digitalWrite(LED1, e.state);
  presses++;
  console.log("Pressed "+presses);
}, BTN, { repeat: true, debounce : 50 });

Now using Pin B4 instead of the button, connect one of the encoder output to pin B4 and the other common wire to ground.
Use pinMode(B4,input_pullup)
http://www.espruino.com/Reference#l__global_pinMode

pinMode(B4,input_pullup);
setWatch(function() {
  digitalPulse(LED2, 1, 50);
}, B4, { repeat: true, debounce : 50, edge: "rising" }

See if the LED blinks as you turn the shaft encoder