A 3-1 reverse at Turf Moor on Saturday means the Reds now sit eight points adrift of the top two with 14 games to play.
Davies' side, who saw a 14-match unbeaten run brought to an end over the weekend, are also having to manage an ever-deepening injury crisis - with Andy Reid the latest onto the treatment table with an ankle complaint.
The odds would appear to be stacking up against Forest, with a play-off berth a more realistic target, but Davies believes anything is possible in a fiercely competitive second tier.
Asked if a challenge for second spot remains on the cards, the Scot said: "Yes, it is, absolutely.
"There are 14 games to go and lots can happen. There is lots to play for, lots of points available."
Davies is doing all he can to strengthen Forest's claims to a Premier League place, with the loan market being scoured for possible new additions.
Midfield is one area that the Reds are keen to bolster, with moves mooted for West Bromwich Albion's Graham Dorrans, Sunderland's Craig Gardner and former City Ground favourite Adlene Guedioura - who was offloaded to Crystal Palace last summer.
Davies added on his pursuit of fresh faces: "We will have a look at the market place. We will have a look at the situation and we will see what happens."