Chelsea's resurgence under Di Matteo came to a grinding holt at the Etihad Stadium on Wednesday night as they lost 2-1 but the Italian says the Blues are heading in the right direction.
The night got off to a great start as Gary Cahill's deflected strike gave Chelsea the lead but back came City and goals by Sergio Aguero and Samir Nasri wrapped up the win.
The defeat has hampered Chelsea's chances of making the top four but Di Matteo is urging his players to stay positive as there is still time to clinch a Champions League place.
The Blues take on Tottenham at the weekend and after Harry Redknapp's men drew 1-1 with Stoke, the game is even more important in the race for Europe.
"It is a setback for us but we look forward to the future," Di Matteo said in his post match press conference. "Two weeks ago we were seven points behind third place, now we are six.
"We need to look at these things because we are going in the right direction. We showed we can match the best teams in this league."