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