I was interested in this also. Syntax should be (if you store images in subfolder relative to notebook):

This didn't work for me initially: rendered as a broken image icon.
Things I tried:
Make sure you have a workspace defined for your root folder. Create the folder, then select "File > Add Folder to Workspace ..."
If that does nothing, try closing and restarting ADS. I've found the rendering to be flaky from time to time after awhile or if you have been opening/closing notebooks a lot.
Related topic has been discussed previously for markdown in general (but worth asking again for ADS!), eg. How to display local image in markdown