Observation = (1) the act of closely observing or monitoring someone or something ; scrutiny ; close examination.

• According to the doctors the patient needs to be under medical observation for a week.
• Movements of planets are under the close observation of scientists.

(2) something that you have learned by seeing or watching and thinking about it.

• She has good power of observation.
• This book contains observations about the causes of cancer.
• The court observed that if bail was granted to the accused, there was a chance of the evidence being tampered with and the witnesses influenced.

Observance = convention, custom ; following of certain rules , rituals etc.

• The manager insisted strict observance of rules while discharging the duties.
• Some people give undue importance to the observance of religious rituals.
• My grandfather is strict about the observance of family conventions.