Decisions regarding a 504 should be data driven. And, while teacher observation is often one aspect of the data, the data should also contain test results, review of the work and input from the 504 team.
You are right to be concerned. While your daughter may be slowly getting through the Hobbit, she could be dyslexic. In fact, if she has a diagnosis, the teacher should be reminded that a dyslexic is never "cured", only remediated. In most cases, even remediated dyslexics have difficult when the volume and pace of reading increases (as it does approaching MS and HS).
Additionally, a hallmark of a learning disability is inconsistency. A child with a disability should never be punished because they are "on" on certain days. When they are off - they are off. Not because they are lazy, unmotivated, or stupid. They are "off" because of their disability and it is usually very very difficult to maintain a high level of efficiency over a long period of time. Celeberate the successes, but keep in mind that the amount of energy and effort needed for these success is almost always impossible to maintain for a long period of time.
The 504 is important documentation. Looking forward - the academic load will increase and the 504 may become even more important. While it is great that she has a good teacher lined up for next year, what if something changes? You will want/need documentation to support the need for accommodations. AND as she moves to MS and HS, she will want to the document to give her the courage to self advocate.
I am assuming that the diagnosis is correct and recent. I agree with DeeDee, that sometimes an independent expert and a new evaluation may help to enlighten teachers. Maybe new testing is in order. If at all possible, I would use an independent (not school district) evaluator to get an updated report to share with the team.
