We enjoyed growing apple trees from seeds, for 5 years we watched them grow. They grew fantastic trees. And then finally it produced the smallest crab apple looking things 2 years straight. Then I grafted known bearing tree onto it 1 year ago. The graft grew & branched well (8'-0 feet & 1" inch plus diameter) and has flowered this year. Great tree stump, hope these apples grow as well as they do on our other trees. I don't know what nematodes do, but they graft onto nematode resistant stock for a reason I am sure.

Two thoughts. I can't say what is wrong for sure, but I would point out that the first growth of your seedling was entirely dependent on the reserves in the seed. Now it's on its own to photosynthesize. What is the potting mix you have it in? It looks like bark chips rather than a standard potting mix or topsoil. If so, it isn't getting what it needs. You might try a balanced liquid fertilizer (e.g. Miracle Grow); otherwise it needs to be in a quality potting mix or good topsoil. My experience is that peaches aren't particularly fastidious when it comes to nutrient/soil requirements; I've grown a number of peaches from seed--mostly to use as rootstock for grafting peach cultivars. I also don't know why you are covering it with a plastic bag. I can't think of anything that would do for you except encourage fungal disease. Have you had it in full sun during the day?

It's supposed to be a potting mix, I've purchased it from the local market but now after seeing the results (on other plants as well, like bulbs didn't bloom!) I have great doubts on its quality!

Probably keeping the plastic bag was wrong :(

Yes it gets full sun on a very sunny window.