I have set up a build step on TeamCity,as described here, to do automatic release deployments to our test server. But it is not using the latest nuget packages that was build in
It could be a few things.
Check out.
http://octopusdeploy.com/documentation/integration/teamcity
You haven't mentioned how your consuming the feeds from Octopus in Teamcity. I would start there.
Next I would use the teamcity action to do your deploy. You asked "Where should the --waitfordeployment flag be added" there is a check box to make sure the deploy has worked before the action can continue.