The city rivals go into the second leg of their UEFA Champions League quarter-final level after a goalless first leg at Vicente Calderon last week. Modric (knee) and Bale (calf) look set to miss out on the Santiago Bernabeu clash as Real attempt to record a first win over Diego Simeone's side since last year's Champions League final.
The European champions are seeking to become the first side to retain the trophy in its current form and, despite question marks over the fitness of two key players as well as the suspension of full-back Marcelo, Ancelotti is confident his side can progress.
"There was a drop in February due to some injuries but now we have returned to our level," the Italian told Radio anch'io sport.
"We hope to be competitive until the end of the Champions League. For the game against Atletico we are not worried, we have to find solutions to some absences.
"It is a great challenge but we will face it at home with great optimism. The Bernabeu will give us a good boost."
Simeone's men may have fallen short of the domestic form they showed in winning La Liga last term but remain formidable opposition in Europe - especially for fellow Spanish sides.
The defeat to Real in Lisbon is Atletico's only defeat in their last 10 European matches against Spanish rivals and, in Antoine Griezmann, they have one of Europe's most in-form strikers.
The France international has six goals in his last five games and Raul Garcia - a possible replacement for suspended midfielder Mario Suarez - says Griezmann's form can help see Atleti through.
"Griezmann’s goals are very important, as they have been through the whole season," Garcia told AS.
"All players, when they play, give their all, and he is adding a lot and doing what is needed.
"For us to reach the semi-final again would be immense. We must forget previous games against them. It helps to know that we have done well [at Santiago Bernabeu] but we can't think of that because that would harm us.
"We're not reliving the past. It’s clear we would have liked to win [the Champions League final last year] but this is another game, another season and we only think about that.
"The team is at an exceptional level and we're going there with a positive mindset."
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