*Keeping watch (7)
I believe this clue is a double definition.
'keeping' is the first definition.
(thesaurus)
'watch' is the second definition.
(thesaurus)
(Other definitions for observation that I've seen before include "Study" , "Comment on something one has heard or seen" , "Surveillance; comment" , "Remark; sighting to determine position" .)
(Other definitions for lookout that I've seen before include "One who keeps watch, a sentry" , "Watching person" , "Observatory" , "A sentry or prospect of luck" , "Sentinel, watcher" .)