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The Waratahs gave up 17 points in the opening 16 minutes but equalised at 17-17 midway through the second half to hold the momentum in an entertaining Suncorp Stadium clash.
However, it was the fitter and hungrier Reds who finished stronger to retain the Bob Templeton Cup in front of 35,801 fans.
Tireless flanker Ed Quirk was the hero as he barged past four defenders in a 35m run to set up a sensational match-winning try to stand-in captain Ben Tapuai, the centre's second of the night, with six minutes left.
Israel Folau scored on his Super Rugby debut to spark the Waratahs' fightback but it was otherwise a deflating start for the code-hopper who had the ball jolted free three times by big tackles.
Reds winger Dom Shipperley also ran over the top of the lanky fullback for the first try.
In his first Super Rugby match in charge, Cheika felt NSW showed good potential but bemoaned their inability to close out the game - their major downfall in 2012 when they lost eight games by less than a converted try.
"We've got to learn how to play under pressure," he said.
"We will and we will learn how to play under pressure more often, more often, more often and the more we do it the better we will get at it."
Captain Dave Dennis agreed: "We were in control of the game at 17-all and the momentum was all with us and for some reason we felt under pressure."
Cheika was also fuming that Reds fullback Mike Harris wasn't sin binned or white carded for a shoulder charge off the ball on Adam Ashley-Cooper as he chased a Drew Mitchell chip.
Ashley-Cooper was replaced due to a neck spasm and the coach wasn't happy that Harris was merely penalised for the 28th-minute incident.
In a far cry from the gritty interstate clashes of years past, the Reds played a high-octane game which ran NSW off their feet in the first half.
The 17-3 halftime scoreline was a true reflection of proceedings as the Reds - with boom youngster Chris Feauai-Sautia starring - looked flash while their arch-rivals paid for a litany of bumbling errors.
But the match turned on its head when radar-boot Harris hit the post with a 45th-minute penalty attempt.
Three minutes later Folau crossed after a Michael Hooper pass deflected off Digby Ioane into the arms of Bernard Foley, who easily put the former Queensland league winger over for his 24th try in his 27th appearance at Suncorp Stadium.
Ben Volavola then shredded Harris on the outside to equalise at 17-all.
Harris atoned with a 49-metre penalty goal in the 68th minute before Quirk and Tapuai sealed the deal off a turnover.
Tapuai, who replaced James Slipper (concussion) as captain, was full of praise for Quirk and back-row amigos Liam Gill and Jake Schatz in their battle against an all-Wallabies pack.
"They were unbelievable," the centre said.
"It was a big ask for the young guns to step up but they did the job and got us over the line."