Rayo Vallecano's former manager described them as the last of the barrio teams, not just in their neighbourhood but of their neighbourhood. Their current manager calls them "different". And their captain is the oldest outfield player in the league. He's also a former bin man and a current union man. There's something appropriate about that too, something right. They once signed Maradona but it was Hugo, not Diego. At one end of their ground they boing up and down to chants of "whoever doesn't bounce is a fascist!" while the other end is not an end at all: just a wall. And there are stickers dotted round their training ground declaring: "love Rayo, hate racism", alongside a picture of one of their best-loved players, tragically killed in a car crash in 1989 just after helping them clinch promotion to the first division.

His name was Laurie Cunningham, their name is Rayo Vallecano. And as their coach says, they're different. "On Sunday at four," José Ramón Sandoval announced in the buildup to this weekend's game with Real Madrid, "anyone who hasn't been here before will find out what this place is like. There's a soul here. There's something about this place: every second something happens, from the first minute to the 93rd. Thousands of throats carry us, like the wind. It never stops; they never stop. More than afición [supporters], we're talking about hinchada [fans]. They have done all they can to make tomorrow special: hopefully everything will go well and everyone will enjoy it, win or lose – that's the priority. You should see them: they have been preparing this for days."

For 3,396 days, in fact. It is almost a decade since Rayo Vallecano, Madrid's third team – no matter what Getafe say – faced Real Madrid in their barrio. Not since December 2002. This was the biggest match for almost a decade. Sure, they were 22 games into the season, 12 of them in Vallecas, but they were yet to welcome Barcelona here. Or Atlético Madrid. Or, above all, Real Madrid.

It's been a long wait. An eventful one too. Rayo have been down to the Second Division and to the Second Division B – known as the "well" because it is easy enough to slip into but almost impossible to get back out of – and back again. Wages have gone unpaid, strikes threatened. Players went almost an entire year unpaid. Staff only got paid because those same players willingly forfeited their own wages. The Ruíz Mateos family, one of the most, ahem, "controversial" in Spain, went bankrupt and finally sold up after almost 20 years. That means Teresa Rivero, the country's only female club president, famous for attacking referees with umbrellas and falling asleep in the directors' box, is gone. For a long time, the fear was that Rayo would be too – never to return.

Fortunately, they are not. They are poor but they are here. Earlier in the season, they had taken thousands to the Bernabéu but this was football coming home. Largely ignored most weeks, on Sunday they were back in the frontline. All week they had been: "it's been fun", said Sandoval with a smile.

The wait felt worth it. Vallecas – or the Independent Republic of Vallekas if you prefer, and some do – has always been a consciously working class barrio, once separate from the city. Blocks of flats huddle together, boxing the ground in on three sides, washing strung from one side of the street to the next, periodically dropping pants on the pavement. The other side of the ground stands on the Avenida Albufera, which ploughs its way right through the middle of Vallecas. The ground, and it is a ground not a stadium, rises up straight – square, concrete, steep, 14,700 fans within touching distance of the pitch. A pitch which is the smallest in the league; 10 metres shorter and 10 narrower than the Bernabéu. Outside, police blocked off the main entrance; piss-perfumed passageways taking you round the ground. Bars spill into the street, ironically named minis gulped down in the sunshine.

It was a Día de Club – that criminal and criminally widespread policy where even season ticket holders have to buy their seats – and the cheapest seats were €60, but still the ground was packed. The best seats, meanwhile, were free: the cramped balconies of the flats that tower over the east end – the east end which is just a wall. Outside, fans clambered up barriers to see even though they couldn't really see anything. Inside, it was noisy and it was all theirs – José Mourinho complained afterwards that barely 300 Madrid fans had made the trip.

A huge painted tarpaulin, weeks in the making, was passed over the supporters in the end. Republican flags, red, yellow and purple, were everywhere. The red and black of the anarchists. Ché Guevara banners and others appealing for the legalisation of cannabis. Not that it needed legalising on this evidence. Countless flags, Rayo's red thunderbolt scorched across them. Song too: the Marseillaise, the Internationale, Yankee Doodle. It went round: end to the sunny side and back; end to shaded side and back again, like a drill sergeant, or Freddie Mercury yodelling with his audience. Lots and lots of noise. No one sat, not once. Instead they squeezed in, clapping and bouncing and singing. Even the half-time entertainment was different: a beast of a man celebrated his prize by parading bare-chested across the pitch waving a Republican flag. Minutes before, Mourinho had walked off down the tunnel and held a thumbs up to the end. Now, those are fans.

And this is a team. Rayo never had much money anyway – when they were last in the First Division one player memorably remarked that he filled the time between a double training session with "lunch at McDonalds and a kip in the back of a truck". Now, under new owners and into administration, they have even less. On Sunday, they did not swap shirts with Madrid's players because the club could not afford it. But Sandoval, a fascinating, energetic, tactically obsessed and genuinely funny coach, created a virtue out of necessity; there is a spirit about the club. Soul, as he puts it. Guts, too. This weekend they had a sponsor on their shirt: appropriately, for the film Indomitable.

At the Santiago Bernabéu earlier in the season they went 1-0 up after 15 seconds. Better to sit on the lead, protect it? "What?" replied one Rayo player, "with this coach? Never." It finished 6-2 to Madrid. Yet if that sounds suicidal, think again. Despite the support, it is at home where they have struggled: a small pitch and a bad surface, stereotypical aids for a small club, haven't benefited a team that try to play football and they went into this weekend with the second most away wins. Rayo are one of the best sides to watch in Spain and they get results too.

There are seven players with no First Division experience but they are good players. Michu twice appeared to have missed his chance to play in primera – first he turned down the chance to play for Sporting because he is an Oviedo fan, then he missed a penalty for Celta in the play-offs – but now that he is here, he has been arguably the season's revelation. He has 11 goals. Rayo have 32, more than any of the nine teams below them – all of them richer. They came into this weekend's fixtures only two points off a Champions League place. "The important thing," said Sandoval, "is that we're eight points off the relegation zone."

And yet they could have got that Champions League place. Piti hit the post, the ball flying back all the way along the line. Michu dashed into the area and smashed it over. Iker Casillas flew to make an astonishing save from José Casado. Emiliano Armenteros still doesn't know how he missed the ball, two yards out and with an empty goal before him. Pepe should have walked, Sergio Ramos too. But the man who did was Michu – for a tackle that wasn't even a foul. "The referee pulled out his revolver immediately," complained Sandoval. A moment's inspiration from Cristiano Ronaldo – a superb backheel – was the game's only goal. Madrid did little else. "This is the hardest game we've had," said Casillas. "Everyone agrees that Rayo didn't deserve to lose," said Mourinho. And when the full-time whistle went, Madrid's players celebrated like they had won the league – which they probably had.

Rayo's players sunk to the floor. Rayo's fans, meanwhile, held up yet another banner: "0-1", it said. "The result doesn't matter: we came here to cheer you on."

Talking points

• Levante won for the first time in 10 weeks – and it was enough for them to reclaim the final Champions League place. As usual, they weren't pretty, but they did at last get a result that they had started to really, really need as they seemed to be slipping closer to the relegation zone. Now, they're fourth.

• "I am sorry for you trying to do your job, but I feel ashamed. Ashamed!" said the Real Zaragoza manager Manolo Jiménez after his side's 5-1 defeat in Málaga. And with that, he got up and left. The complaint was simple: Zaragoza's players just don't care. Worse still, nor it seems to the owners. Agapito Iglesias has destroyed a once-great club. Zaragoza are bottom, 12 points from safety. Over one hundred million in debt, if they go, they might go.

• "We won't win the league." That was Pep Guardiola's verdict after Barcelona beat Atlético Madrid 2-1 with a wonderful goal from Leo Messi that took advantage of Atlético's wall not being ready but still required a hell of a shot. Ten points with just 14 games to go is too big a gap now. As for Atlético, Diego Simeone said: "we lost to a moment of genius." It was Atléti's first defeat under Simeone and they slipped down to ninth. They are still just three points off the Champions League, though.

• Handball gate: Guardiola says he is not aware of a directive that says that Spanish referees must give a yellow card for every handball, while a former first division referee says there is no such thing. One other first division manager though says his understanding is that all handballs will be given as yellow and that was reiterated in an email sent to all the clubs earlier in the season. There's something frankly a bit surreal that no one seems to have straight answer to a very straight question. But then this is the Spanish federation we're talking about. It is also a bit bizarre that every single handball becomes yellow – even the most innocuous of them. Meanwhile, every foul is not, even when they are a quite a lot more than innocuous. Strip away the club allegiance and Guardiola makes a worthwhile point when he notes that Messi has reached five yellows and therefore a suspension (three handballs, one protest and one dive) at the same time as Pepe. (Although Pepe also has a red card from two yellows in Seville).

Results Racing 1-1 Sporting, Betis 1-1 Getafe, Málaga 5-1 Zaragoza, Espanyol 1-2 Levante, Villarreal 2-2 Athletic, Rayo 0-1 Real Madrid, Valencia 1-2 Sevilla, Real Sociedad 1-0 Mallorca, Osasuna 2-1 Granada, Atlético 1-2 Barcelona.